What are the expenses that can be deducted from rental income?

 It's one of the most often asked questions, and it's easy to see why. The distinction between a CAPITAL expense and a REVENUE expense is often misunderstood by landlords. Identifying the difference between a repair and an improvement, as well as only claiming mortgage interest rather than capital repayments on loans.

The popular belief is that because you invested money in your home, you should be able to deduct it from your rental revenue.

Beware…!

Some expenses are never eligible for tax relief.

Some expenses can only be deducted from the profit when the property is sold.

When computing taxable income, some expenses can be deducted from rental revenue.

Some expenses may not be deducted, although they are subject to special rules.

Let's take each item one by one.

When you purchase a home, there are a few things to consider.

The costs and expenses of the purchase are included in the purchase price and cannot be deducted from rental revenue. We recommend that you make a short statement of all costs, as follows:

  • Price of purchase
  • Duty on Stamps
  • Fees for Legal Services
  • Fees for building inspections
  • Fees for independent inspections
  • Costs of auctioneers (for those of you who have bought through auctions)

The majority of the charges should be included in your solicitor's completion statement.

When you sell the property, these can be removed from the gain (or added to the loss). Keep track of all expenses, including supporting receipts, so you can claim Capital Gains Tax relief when you sell.

What happens if the deal doesn't work out?

In other words, any fees and expenses incurred as a result of a deal falling through are never allowed.

So, if you're thinking of buying a house and spend money on lawyers and surveys, but then decide not to proceed or, worse yet, the seller backs out, you won't get any tax relief.

So, what are the expenses that can be deducted from rental income?

The usual guideline is that the money must be spent entirely and solely on the Rental Income business. Here's a rundown:

Costs of financing (restricted for most residential properties)

Finance costs include interest and arrangement fees on any loan taken out to buy or improve the rental property, as well as any bank charges on a separate rental property bank account. If you have a repayment mortgage, only the interest component, not the total repayments, qualifies as financial charges.

Finance charges are approved in full for commercial properties, Furnished Holiday Lettings (see above), and residential homes owned by limited liability firms.

Allowable Expenses for residential properties owned by individuals or partnerships are limited starting April 6, 2020, and can only be claimed against the tax liability on the net rental income after subtracting any other expenses and losses brought forward but before any finance charges. Prior to April 6, 2020, the restriction was phased in over three years.

Are you still on the lookout for your point of interest? Our accountants in beckenham can provide you with the appropriate answers for your case. Get in contact with us right away!


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