Meg Saksida explains how motor expenses in managing your property can be offset against your rental income.
Historically, there was only one method of deducting motor expenses incurred from a rental property business, which was by firstly claiming capital allowances on the cost of the vehicle, and then deducting the actual running costs annually. From the tax year 2017/18, unincorporated landlords using the cash or the accruals basis have been able to decide instead to use a fixed rate mileage deduction.
The fixed-rate mileage allowance
The statutory fixed (or ‘flat rate’) allowance gives an amount per mile driven for the purposes of the rental property business. The rate does not change depending on the number of people in the vehicle. The fixed allowance covers all the costs of the vehicle including the initial cost and any depreciation, and the running and maintenance costs such as fuel, MOTs, servicing, and insurance.
The amounts that can be claimed are:
- Cars and goods vehicles for the first 10,000 miles 45p
- Cars and goods vehicles after the first 10,000 miles 25p
- Motorcycles 24p
Once an individual has decided to use the fixed-rate basis, they cannot change the method for the whole time that particular vehicle is used in the business.
Claiming actual running costs and capital allowances
If the individual does not wish to use the fixed rate allowance, they may be able to claim capital allowances and deduct the precise running costs from profits.
‘Wholly and exclusively’ rule
In order to deduct the actual expenses incurred when making business journeys, it is important to understand what a business journey is. When considering income from property, almost all the rules and provisions concerning expenses are the same for the general trading income expense rules. These centre around the concept that all expenses must be ‘wholly and exclusively’ for the purpose of the business in order to be deductible, and therefore journeys made for the purpose of the rental business will be allowable deductions. There is, however, a continuum on whether an activity is ‘wholly and exclusively’ for the business and it may not be obvious whether the journey in question is or not.
Take, for example, a journey to inspect a rental property. Driving there directly and travelling nowhere out of the way from A to B during the journey would clearly be a ‘wholly and exclusively’ journey for the purpose of the business. Compare this with the rental property being conveniently located beside a popular restaurant. Driving to the restaurant for a birthday celebration lunch with friends, and popping in to inspect the property after lunch, would not be a ‘wholly and exclusively’ business journey. Because of this continuum, it is wise for a landlord to have evidence, such as agreements, notes of meetings and photos, that proves that the expense of the journey can be justified as being a ‘wholly and exclusively’ business expense.
Note that a landlord could still be making a journey ‘wholly and exclusively’ for business purposes if the personal benefit received is only incidental. A well-deserved break during a busy day and the opportunity to drive undisturbed for half an hour while listening to the radio during the journey would not be deemed to be a significant enough benefit to render the journey not ‘wholly and exclusively’ for the business. HMRC gives the example of the landlord stopping on the way to collect a newspaper as being incidental.
The intention for the journey is important, but according to HMRC, not decisive; so even if it was your intention to inspect the rental property, if you spent time in the same location as the rental property visiting friends or shops, on the facts it may not be deemed to be a ‘wholly and exclusively’ journey for the business. The facts are, therefore, more important than the intention of the landlord.
Case law
This concept of the journey being required to be for business purposes was highlighted in the recent case Daniels v HMRC [2018] UKFTT 462. A lap dancer had claimed travel from home to the club in which she worked, as she alleged that she was carrying out her business at her home. The facts were, however, that the travel expenses were partly incurred because of where she chose to live and partly for her to get from her home to her place of work. Travel between her home and the club in which she worked was, therefore, not ‘wholly and exclusively’ for the purposes of her profession.
In Horton v Young [1971] 47 TC 60 on the other hand, it was held that the bricklayer in this case did carry on his trade from home, which was deemed to be a workplace, so that the miles travelled from his home to the many and varied sites at which he worked were travelled for the purposes of the trade.
In looking at a rental business, if the business is carried out at home, wholly and exclusive journeys from home to the location of the rental property will be allowed. If, however, there is another location from which the property business is being managed, home to that location will not be business travel, but wholly and exclusively business travel from this other location to the rental property will be allowed. Care should be taken if the rental property is managed by a letting agent or property management company; in these cases, the home of the owner will almost certainly not be the property business’s base.
Split use of the vehicle for private and property business
Strictly, if a trading expense is not ‘wholly and exclusively’ for the purposes of the property business, it is not able to be deducted. However, there are some cases in which this strict rule is relaxed, and landlord motor vehicle expenses are one of these situations.
Where there is an identifiable part of an expense that is ‘wholly and exclusively’ incurred for the purposes of the business, that portion may be deducted. If a car, for example, is used for both business and private purposes, the costs of running the car may be shared between business purposes and private purposes on a just and reasonable basis. For example, if 40% of the car mileage is for business use, a landlord could deduct 40% of the running costs of the car.
Capital allowances
The cost of the vehicle is not deductible in a rental property business; nor is a deduction available for depreciation. However, capital allowances (under the plant and machinery category) may be applicable. Again, in order to be able to deduct capital allowances on a vehicle being used in the business, the use must normally be on a ‘wholly and exclusively’ basis.
However, here too there is a relaxation of the strict rules; if there is some private use the landlord can claim allowances on the business portion of the cost of the vehicle.
Practical Tip:
Being aware of the options of how a landlord can offset business motor vehicle expenses against rental income is crucial in deciding which option is best in the circumstances of any particular landlord’s property business.
