Renting a Second Property? What Can Be Claimed?
Any time you rent out a property the profit earned will be subject to income tax. However the taxable profit can be reduced by the claiming of legitimate expenditure. So what expenses can be claimed?
Mortgage payments
The interest element (not the capital repayment) of any loan taken out against a rented property is allowable. The amount borrowed can be used for any purpose e.g. buying a new car, and still obtain tax relief. Where you have equity in the rented property you are, subject to certain limits, entitled to draw this from the rental business. If the business doesn’t have the cash, you can borrow it.
Structural repairs and maintenance.
The general rule is that you can claim expenses for work undertaken to ensure the property does not deteriorate. However, if you make any improvements or alterations to a property these will not be allowable, e.g., knocking down an internal wall or construction work to install an en-suite bathroom.
The distinction between improvement costs and repairs, can, in some cases be a grey area.
Redecoration is usually considered to be a repair, but if it is carried out as an integral part of an improvement it won’t be allowed. Care should be taken to ensure the correct treatment is applied and detailed records should be kept.
Fixtures and fittings
It is often difficult to decide if these items are improvements or repairs, e.g., installing a new kitchen. If you replace the kitchen on a ‘like for like’ basis, it would usually be classed as a repair. If you include new cupboards, it would be an improvement and not therefore allowable.
Furnishings and furniture
If the property is let furnished, a wear and tear allowance can be claimed to cover the costs of the furniture and furnishings. This allowance is based on the gross rents less rates. If the property is not furnished or only partly furnished, no claim can be made for anything included such as carpets.
Legal and professional fees
The legal costs of purchasing the property are not tax deductible against the rents. Instead they are treated as part of the cost of the property when it is sold.
Other expenses
The above expenses are the ones which give the most trouble in deciding whether or not they are deductible. There are many other expenses to consider e.g. insurances, travel costs. letting agent’s fees, etc.
Green and Co have extensive experience in the preparation of rental accounts. For further information please contact us.
Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.
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