Claiming property business expenses is a priority task for landlords keen to reduce their tax bills. Every pound put through rental accounts reduces taxable profits by the same amount. The incentive is keeping more of the money you earn from running a rental business in your pocket. The same rules for claiming expenses apply to buy-to-lets, houses in multiple occupation (HMOs) and holiday lets regardless of the property’s location.
Before you start sifting through that pile of invoices and receipts, there are a couple of golden rules you must bear in mind when filing your claim with HM Revenue & Customs.
The ‘Wholly And Exclusively’ Rule
The ‘wholly and exclusively’ rule is a pain to get your head around but a necessary tool for expense conscious landlords.
The rule goes like this –you can claim almost anything you like as providing you spent the money 100% on something for your property business. However, there are some limits, which are listed further on.
But that doesn’t mean you can’t have a part-personal/part-business expense.
For example, one landlord buys a trailer for his car to ferry garden tools and waste between his rentals and the tip. That’s a 100% business expense, so it meets the ‘wholly and exclusively’ rule. Therefore, the landlord can put the cost of the trailer through his accounts as a business expense.
However, another landlord buys an identical trailer to use at home and to ferry his garden tools and waste between rentals and the tip. That breaks the ‘wholly and exclusively’ rule but doesn’t mean you can’t claim some of the cost of the trailer as a business expense.
That’s called ‘apportionment’. Apportionment means splitting the expense pro-rata personal and business use.
So, if you used the trailer in your property business 40% of the time, you can claim 40% of the cost as a business expense.
HMRC may quiz you about splitting the expense. The tax officer will expect you to explain how you reached the amount claimed and that the split is fair and reasonable. The best way to do this is to keep a note in your accounts to jog your memory.
The Secret List Of Landlord Business Expenses
If you call HMRC and ask if you can claim an expense, the most likely answer is to include the cost in your tax return as tax officials cannot give you tax advice.
However, if HMRC disputes the claim, you could end up with a fine for making a mistake.
If you want to know what expenses you can claim, look up HMRC’s online guidance for tax inspectors, which lists the most common landlord expenses.
HMRC is quick to say there is no list, but you can read the details the taxman wants to keep secret in the Property Income Manual.
Four Property Business Expenses To Stay Away From
HMRC will always challenge some business expense claims:
Paying for your own time out of rental income
Landlords regularly ask their accountants if they can pay a rate per hour for the time they put into their property businesses.
The answer is simply no. Your time is an investment cost, like the time spent researching stock markets if you invest in shares.
Another no-no. Treating your letting agent to a coffee is not a business expense, and neither is buying a gift for a gardener or tenant.
Fines are a personal penalty. Therefore, you cannot offset them against a property business, regardless of if the fine is for a property licensing transgression or a parking ticket.
Freebie letting to family and friends
Any letting time that is gifted for free or at a discount is a personal gesture. You cannot claim property business expenses that come to more than the monthly rent if there is in.
The term that applies is ‘uncommercial let’. These properties are not included on a tax return until sold when capital gains tax applies as they are tax neutral, which means they make no profit or loss.
Claiming Property Business Expenses FAQ
How do I keep a record of business expenses?
Create a spreadsheet, use an app or file paper records.
The tax year for landlords runs from April 6 to the following April 5. Therefore, if you are starting as a landlord, you will have a short first year.
For example, you start letting on September 1. Your tax year runs until the following April 5 and then reverts to April 6 until the next April 5.
Think about separating expenses into months as well as years, as an envelope with a month’s receipts in is a lot easier to search than a bag stuffed with a year’s paperwork.
How do I keep track of travel costs?
Most landlords keep a mileage log listing:
- The date of the trip
- Start and finish points
- Miles travelled
- If you carried a passenger
Multiply the mileage by the HMRC rate to calculate the claim for each business trip.
You can check the current rate here
Do companies claim the same expenses as landlords?
Companies have similar rules for claiming business expenses as landlords, but there are some differences. The main one is how the accounts treat finance and mortgage interest. Instead of the 20% tax credit for landlords, companies and holiday let owners can claim all the costs.
I’m a decorator; why can’t I claim for my time doing up a buy-to-let?
The general rule is an investor cannot claim for their own time spent on their asset.
The rule applies to stockpickers who spend hours poring over shares, mechanics who do up classic cars and landlords who maintain their buy-to-lets.
However, they can pay family or friends to do the job for them, as long as they are not co-owners of the property. Bear in mind, the rate for the job should be competitive. For example, you can’t pay someone £50,000 for a week’s work.
Looking for more information about landlord costs and finance? Read our blog on Captial Gains Tax to see how it could affect you.