For tax purposes, good record keeping is essential. Without complete and accurate records, it will not be possible to provide correct details of taxable income or to benefit from allowable deductions. Aside from the risk of paying more tax than is necessary, landlords who fail to take their record keeping obligations seriously may also find that they are on the receiving end of a penalty from HMRC.
A deduction is available for expenses that are incurred wholly and exclusively for the purposes of the rental business. A deduction is available for qualifying revenue expenses regardless of whether the accounts are prepared on the cash basis or under the traditional accruals basis.
Revenue expenses are varied and are those expenses incurred in the day to day running of the property rental business. They include:
• office expenses
• phone calls
• cost of advertising for tenants
• fees paid to a managing agent
• cleaning costs
• general maintenance and repairs
A record should be kept of all revenue expenses, supported by invoices, receipts and suchlike.
The treatment of capital expenditure depends on whether the cash or the accruals basis is used. For most smaller landlords, the cash basis is now the default basis.
Under the cash basis, capital expenditure can be deducted unless the disallowance is specifically prohibited (as in the case in relation to cars and land and property). Under the accruals basis, a deduction is not given for capital expenditure, although in limited cases capital allowances may be available. Capital expenditure would include improvements to the property and new furniture or equipment which does not replace old items.
Records should identify whether expenditure is capital or revenue and also whether it relates to private expenditure so that it can be excluded.
Records should also be kept of replacement domestic items and the nature of those items. A deduction is available on a like-for-like basis.
Although the property rental business does not start until the property is first let, records should start as soon as expenditure is incurred in preparation for the letting.
As well as allowing relief for expenses incurred while the property is let, relief is also available for expenses which are related to the property rental business and which are incurred in the seven years prior to the start of the business. Relief is given on the same basis as for expenses incurred after the start of the property rental business; expenses can be deducted as long as they are incurred wholly and exclusively for the purposes of the property rental business. Capital expenditure is treated in accordance with rules applying to the chosen basis of accounts preparation.
Relief is available under the pre-trading rules, as long as:
• the expenditure is incurred within a period of seven years before the date on which the rental business started
• the expenditure is not otherwise allowable as a deduction for tax purposes
• the expenditure would have been allowed as a deduction has it been incurred after the rental business had started
Relief is given by treating the expenses as if they were incurred on the first day of the property rental business.
Expenses incurred in getting a property ready to let can be significant. It is important that accurate records are kept of all expenditure incurred wholly and exclusively for the purposes of the let from the outset so that valuable deductions are not overlooked.
Partner note: ITTOIA 2005, s. 57; CTA 2009, s. 61.
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