Tax Deductions for New Landlords ?
Maybe you are in the position of preparing your accounts for the first year of your property rental business after spending a lot of money getting the properties ready for rental. If so, it’s likely you are wondering how much of the expenditure is tax deductible?
New property business
Let’s imagine that in 2021 your bought two properties with money inherited with a plan to bring them up to date and let them. If all goes well, you hope to buy more properties with the aim that they would provide you an income during your retirement. Perhaps you have spent a fair amount on redecoration, repairs, structural work, fixtures, fittings and furnishings. Yet, despite reading guidance you’re still unclear on what tax deductions you’re entitled to.
Furnishings & equipment
The first step you’ld need to take is identify the expenditure which counts as capital and that which does not. This determines whether a tax deduction can be claimed against rental income, capital gains or sometimes not at all. The first-time cost of providing furnishings and equipment for use by tenants of a residential property is not a tax-deductible expense. However, a deduction will be allowed for the cost of replacement items in the future.
A way to mitigate this is to let the property with equipment and furnishings you acquired when you bought the property (it’s a good idea to have the sale/purchase contract list the items). These are likely to cost very little. That way what you spend on replacing them, which you can do soon after the property is on the market for letting (even before the tenant moves in), you’re entitled to a tax deduction for.
Fixtures and fittings
HMRC’s approach to the cost of replacing boilers, water and light fittings etc. is that they are repairs to the building and therefore the cost of replacing them is usually tax deductible from rental income.
Structural improvements
Costs incurred improving or changing the structure of the properties, e.g. knocking down walls, converting lofts, is not tax deductible from rental income. Instead, it can be deducted when working out any capital gain or loss when the property is sold, as long as the improvement still exists at the time of sale.
Repairs and redecoration
Normally, the cost of repairs and redecoration is tax deductible from rental income. However, HMRC may think otherwise. HMRC may argue expenditure on repairs and redecoration that’s so significant it constitutes a repair needed to make the property fit for letting, is not tax deductible from rental income. Instead, it says that the same rules for structural improvements apply.
Whether or not expenditure gets tax deducted or not is subjective. Generally, HMRC should accept repairs and redecoration costs incurred before letting commences as tax deductible from rental income and we recommend claiming them as such. HMRC internal guidance on this topic is quite helpful on this point.
All expenditure apart from that on furnishings and equipment for use by the tenant qualifies for tax relief. Generally, expenditure on repairs and redecoration is tax deductible from rental income while that for structural improvements is deductible when calculating capital gains or losses when the property is sold.
See also government website content:
Property Income Manual – Deductions
Property Income Manual – Furnished lettings
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