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Taxation of Property

Landlords are subject to tax on their rental income and it is in their interests to minimise their taxable income. So what costs can you and can you not deduct? To work out your taxable rental profit, subtract any allowable expenses incurred wholly and exclusively from renting out your property and then deduct any allowances you are entitled to.

Allowable expenses

The most common types of expenses you can deduct are:

  • water rates, council tax, gas and electricity
  • repairs and maintenance but strictly not improvements
  • accountant’s fees
  • contents and buildings insurance
  • rents, ground rents and service charges
  • Interest on a mortgage to buy the property but not the capital repayments of the loan
  • wages of gardeners and cleaners or other people providing a service
  • fees of lettings agents
  • legal fees for lets of a year or less, or for renewing a lease of less than 50 years
  • advertising for new tenants

There are special rules for the cost of insulation, capital items and furnishings.

Until April 2015 you can claim for the cost of loft, wall and floor insulation, draught-proofing and insulation for hot water systems (up to £1,500 per residential property)

Renewals allowance

You can claim the costs of furnishings by a choice of two methods: the renewals allowance or the wear and tear allowance. With the renewals allowance, you can claim the cost of furnishings as you replace them and only until you have replaced them.

Wear and tear allowance

A Wear and Tear allowance can be deducted from rental income instead of the renewals allowance on furnishings and fittings. This allowance is broadly calculated as 10% of rents receivable.

This method is often easier to calculate and simplifies the accounting process. Further it means you are likely to get a deduction on a regular basis rather than on a one-off basis. It can be better for budgeting therefore.

Annual investment allowance

The costs of certain fixtures, plant and machinery can be deducted against rental income by categorising it under the Annual Investment Allowance. The limit is £250,000 per annum from 1January 2013 until 31 December 2014. This relief is not available on residential lettings.

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Article writren by David Wesley-Yates

David Wesley-Yates is a Chartered Accountant and Chartered Tax Adviser and works at Red & Black, a firm of accountants based in Hampshire covering the South East. He can be contacted on d.wesley-yates@redandblackaccountancy.com.

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