When you start a property rental business, you realise quickly how complex it can be. It’s a minefield of potential red tape and regulation and you’re not sure what is and is not permissible to claim as allowable expenses.
The Obvious Allowable Expenses
There are many things that should be clear, but as a new landlord, you want to ensure you’re doing it right. The following are the most obvious allowable expenses against your income:
- Repairs to the property and anything in it, and maintenance. This includes boiler maintenance, repairing a fence and laying new carpet
- Replacements for anything used exclusively in the property. This includes a new boiler, locks, windows and doors
- The cost of redecoration for reasons not related to repair or replacement, simply that you want to give the place a spruce
A note on replacements: How you class replacements depend on the value. A broken window is an Allowable Expense until it’s replaced with something that will significantly increase the sell-on value of a property (for example, from wooden single glazed to PVC double glazed). More information on Capital Expenditure is later.
Testing Whether Something is an Allowable Expense
For everything else, there are several tests you can carry out to determine whether something is or is not an allowable expense.
The “Wholly and Exclusively” test applies to any goods or services expense which is wholly and exclusively for the property and will be used only in that property. A new boiler certainly comes under that, so will a new fence, new locks and so on. Anything that you are likely to borrow will not be fully covered.
The Capital Expense Test is an expense applied to an item inside or for the property designed to increase its value. This is not traded off against income, but against the capital expenditure as it will last more than one accounting period. Examples of Capital Expenses include an extension, loft conversion or garage.
Repair and Maintenance Test we have already discussed what these are, but something is classed as repair or maintenance if it restores a part of the property to its original function. Also mentioned above, if something increases the value of a property, then it is technically a Capital Expense.
Income and Expense as a Married Couple
This is an important note. When a married couple or those in a civil partnership jointly own a property rather than the property being owned by a corporation, both the profits and the expenses must be split equally. If a property is jointly owned by a couple who are not married or in a civil partnership, it is down to the couple how (and if) they divide income and expenses associated with property lettings.