“There are however many thousands of landlords with long term funding in place, many of whom are currently
benefitting from variable rate loans on which annual interest charges have plummeted since last autumn.”
now arising. Rental business losses can only be used against
rental business profits in future years and are not available
against the taxpayers other income. They are however
available to carry forward indefinitely until relief can be given.
CLAIM LEGITIMATE EXPENSES INCURRED
Many of the big ticket expenses are obvious, mortgage
interest and letting agents fees for example, but many
costs are overlooked. In addition some expenses are
disregarded as they are thought to be of a capital nature
and thus add to the value of the property rather than
being offset against the rental income.
Technically all expenses must be ‘wholly and
exclusively’ for the purpose of the rental business if they
are to be deductible against rental income however
HMRC does allow the apportionment of some expenses
where there is a duality of purpose.
Repairs are defined as the restoration of an asset by
replacing parts of the whole asset. There won’t be a repair
however if a significant improvement of the asset beyond its
original condition results - that will be capital expenditure as
will any improvements to the property.
This is however a grey area giving scope for argument
and interpretation. HMRC generally accept that a like for
like replacement using up to date materials is not a capital
improvement but a revenue repair.
Other smaller items of allowable expenditure may
include advertisements, electrical and gas safety
certification, professional fees, subscriptions to trade
journals or professional bodies and travel expenses to
and from the property.
PROVISIONS FOR REPAIRS TO PREMISES
A taxpayer can also deduct expenditure on repairs where
the liability to pay for the work is incurred during the tax
year but payment has not been made by April 5. However a
provision for repairs to premises that they propose to incur
in the future is not deductible. For example, they can’t claim
a deduction for repair work they think will need doing next
year but which they have not yet incurred any liability to pay.
OPINION
WEAR AND TEAR
Residential properties that are let complete with fixtures
and fittings are eligible for a wear and tear allowance –
effectively an allowance for the depreciation of the furniture
and fittings – calculated at 10 percent of the rental income.
In most cases this will be the most effective claim to
make however, under extra-statutory concession B47 the
taxpayer can claim a ‘renewals allowance’ as an alternative
under which the net cost of replacing a particular item of
furniture is allowed as a revenue deduction.
The rules do not allow the taxpayer to chop and change
the claim each year however if there was a large amount of
additional expenditure during the year (perhaps because of
the surplus cash being generated) a claim for a renewals
allowance may be very effective in reducing taxable profits.
JOINTLY OWNED PROPERTY
If surplus profits continue to be worrying you then
perhaps consideration should be given to splitting the
rental income between yourself and a lower earning
spouse. The use of a spouse’s annual allowance or
basic rate tax band can have a significant impact in
reducing the overall tax liability.
Where property is in joint names a declaration will
need to be made to HMRC within 60 days and proper
legal advice should be sought as it will affect your legal
entitlement to a share of the asset.
…..AND FINALLY
Maybe the best option for taxpayers is to save the cash
and pay the tax as one day soon the tide will turn and those
floating interest rates will be rising on the incoming flow.
The cash will be needed to stay afloat.
Perhaps now is the right time to give serious thought to
locking into some sensible fixed rate money – but that will
have to be the subject of an entirely different article!
FOR MORE INFORMATION:
Paul Windsor is a partner at specialist UK real estate
tax advisor WSM Property wsm.co.uk
www.estatesreview.com 15
MATT CARDY / MARTIN POOLE
UP FRONT
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