Guide to Rental Income and Expenses

Guide to Rental Income and Expenses

Guide to Rental Income and Expenses

Whether you are looking to purchase a new home and rent out your old one or living with your parents to make some money off of your current home, it is always a good thing to be aware of what you can do to reduce your tax bill.

As the name implies, rental income is the payment you receive from a third party in exchange. If you’re lucky enough to own a property you can rent out; then you’ll know what this is already. For those of you that don’t and are looking to get into this business, it’s the money you pay to your landlord to rent your current accommodation.

Tax. Yes, self-assessment income tax. Once per year, you’ll need to fill out a return (or get us to do it for you), so you can submit your income figures to HMRC. Once they have these figures and your tax calculations, you get the fun task of paying them money. Why should you pay more when you have the option to pay less? The thing to keep in mind is that if you have relevant expenses, these will offset against your income figure, and the amount of tax you pay will be reduced. As is possible with anyone, you may have missed a couple of expenses you can claim and may want to plan some future expenses you haven’t incurred yet. Every little helps.

Now, some tax is a good thing, as you can’t have profits without tax and the reason everyone is in the business is to make some money. So how much should you try to make? Well, HMRC has thresholds for the amount of income you can make in a year before they start taxing you more. In the current 2020/21 year this would be £50,000 (£12500 personal allowance and £37500 lower tax rate threshold). Good news, the £12500 is tax free, bad news, the £37500 will get taxed at 20% If you receive more than this you’ll start getting taxed on the excess at 40% and it’s this tax rate you’ll want to avoid unless you are receiving massive amounts of money that it becomes irrelevant to you.

This is where planning your expenses comes in. If you know that you’ll receive £55,000 in the year and you know a repair is required that costs £5,000, get it done. You’ll reduce your income to £50,000 and incur no higher tax rate.

What expenses can you claim though? Let’s see.

Agent Fees

You need help finding tenants to rent your accommodation to? The fee’s you pay an estate agent to advertise your property for rent are allowable. The commission you have to pay them can be included in this too.

Repairs

Genuine repairs get included and are allowable. This excludes capital expenditure so no improvements to your assets! As an example, a window in your property breaks. You pay to have this fixed. This is an allowable genuine repair expense. While having the window fixed, the contractor points out that your roof can be insulated for a fee, improving it. This isn’t allowed as it is improving the property instead of just repairing it.

Where an item is attached to your property (such as baths, sinks, toilets) this is counted as being a part of the property and repairs to these items are included as genuine repairs. Luckily, HMRC have stated that the replacement of an old attached item with a new modern one can be counted as a repair so if you need to replace anything, you can go ahead.

Let’s be clear here though, if you replace a more modern attachment with a newer one, then this would not count as a repair. It’s a grey area. If you need help deciding whether a repair is allowable, talk to your assigned accountant and they will be able to tell you with a little information.

If you just purchased the property and repairs a required for you to be able to rent the property out, these unfortunately are classified as capital expenditure so you cannot claim for these.

Motor Expenses

If transportation is required for your to run your property business, then you can potentially claim some of the expenses against you income. If you are going to claim by mileage, you can claim the HMRC’s mileage rates of 45p per mile for the first 10,000 miles each year and then 25p per mile for the remaining miles. You won’t be able to claim repairs and fuel on top of this though as HMRC have stated these are included in the rates.

On the other hand, you can claim a percentage of the costs to run your vehicle. HMRC knows that there will always be some personal use of your vehicle so do not claim the full expenditure of the vehicle. You’ll need to work out what percentage of travel in the vehicle is actually for business and claim that percentage of the costs instead.

Once you pick one of these options though, you have to keep using it until you change your vehicle. HMRC will not allow you to keep jumping back and forth when one turns out to be better than the other in a particular year.

Travel and Subsistence

Travel And Subsistence

You need to get a train, plane or taxi for your business? Go ahead and claim it. You can even claim hotel and food costs while you are out doing your thing. Keep in mind however that if this travel and accommodation has any hint of personal use, you can no longer claim it. If you have friends and family going with you, keep your expense receipts separate from theirs.

Office Costs

Did you know that you can claim your use of home costs? You can work out the business portion of your home expenses if you work from home based on the amount of floor space you use while working and the amount of time you spend working. Alternatively, you can claim the use of home flat rate. You’ll find one of these methods to be better than the other so check your figures with your accountant first and then get started. Once you pick a method, you should stick to using going forward as a HMRC auditor will likely get annoyed if they have to keep going back an forth when looking through your information.

The flat rates for use of home expenses are as follows. They’re based on hours worked from home so keep track of these hours as you work.

Hours of business use per monthFlat rate per month
25 to 50£10
51 to 100£18
101 and more£26

Legal and Professional Fees

Your accountancy fee’s? They’re deductible. You can also claim for some of your course fees where the education is in relation to your property business. Even some of your solicitor, surveyor and estate agency fees can be deducted. You’ll have to be careful with these fees however as not all of them can be claimed. To be able to get an accurate understanding of what you can claim, you’ll have to talk to your assigned accountant and explain the circumstances of each cost in question. The last thing you need is a penalty from HMRC for getting it wrong.

Furnishings

You may have heard of wear and tear allowance. That’s gone now. You can still claim the costs of replacing existing furniture, however.

Start-up costs

Startup Costs

Before you even start trading in property, you are likely to incur some expenses to get going. The pre-trading expenses that would be allowable after your business starts trading can be deducted. Unfortunately, improvements are not. It’s the repairs bringing everything up to working order that count. Your assigned accountant will be more than happy to go through your pre-trading expenses with you to determine what can and cannot be claimed.

Other allowable expenses

Other extraneous expenses that can be claimed are as follows:

  1. Council tax and utility bills (but only where you are paying them instead of the tenant)
  2. Ground Rent and Service Charges
  3. Insurance

This list is not exhaustive though. If you have any queries over expenses not mentioned in this article, please contact us and we will look into each of them for you.

Rental Losses

HMRC give as well as take and they understand that some of you may fall on hard times. To this effect, they allow you to offset losses from one of your properties against the income from another. You can only offset rental losses against rental income though. You can’t do it against your other personal types of income. Make sure you include your losses on your self-assessment return (including excessive losses you couldn’t net off) as you will be able to carry forward loss against a following year to net off then instead.

A small point to note here is that you cannot offset losses from a furnished holiday let property against a commercial/residential let property and vice versa. These will need to be kept separate.

Capital Allowances

On the other hand, you may be able to claim capital allowances on certain capital expenditure. Grey area again however as only some capital allowances are allowed. Capital allowances for the following are allowed:

  1. Vehicles
  2. Computers
  3. Tools such as lawnmowers and ladders

Essentially, anything used in the property business. Allowances that cannot be included are those such as:

  1. For Furniture
  2. Household equipment provided for use in a furnished letting

Replacement of Domestic Items Relief

As mentioned above, capital allowances cannot be claimed in respect of furnishings in a residential property. If you are letting out your property however, you can claim for the cost of replacing domestic items. This includes items such as:

  1. Furniture and furnishings
  2. Household appliances
  3. Kitchenware
Replacement Of Domestic Items Relief

So that you are aware, relief is not available on items where capital allowance was already allowed to be claimed.

You can’t get this relief if the property is a furnished holiday letting or where rent a room relief is claimed.

If the item you replace it with is substantially better than the original, you can only claim up to the price of the original item or similar.

You can claim for the cost of disposing of the original item though.

Lastly, you do not get the relief if you use the property yourself during the year.

Interest Relief

Unless you are loaded, chances are that you purchased your property via the use of a mortgage. When you let out your property, you can get relief on the on the interest paid for the loan.

For furnished holiday lettings, you can deduct the interest as an allowable expense. For residential properties however, you cannot claim it as an allowable expense. Instead, it needs to be included as a reduction when working out your income tax to give basic rate tax relief.

The basic rate tax relief is only available at the lower of:

  1. The property income for the year (less losses brought forward) or,
  2. Adjusted total income (being net income less savings and dividend income less the personal allowance.)

Where the amount on which 20% relief (basic rate tax relief) is given is less than the amount of interest paid (that is eligible for the relief) the excess amount is which does not receive relief is carried forward to the following year. It then gets added to the amount of interest eligible for relief in that next year.

Summary

All in all, there is a lot you can do with your expenses to reduce your income tax liability and I hope you found this information useful. The rules around this topic do change a lot though so keep the date of this article in mind. If you need the most up to date information, please call us and we will be happy to help you.

We specialise in Accounting for Property Landlords  and helping them save tax.

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