By Louise Misiewicz
How can you maximise your property rental income?
What are you doing to increase your portfolio revenues?
Are you unsure what costs may be offset against your tax bill?
Do you want to avoid tax legally without HMRC breathing down your neck?
As part of another blog series of articles, this week is continuing a recent client consultation and pinpointing ways in which a property investor can increase rental incomes within their portfolio.
In Part Four this week, I’m looking at additional questions to think about, and am including the most pertinent ones I asked my landlord client as we ran through the profitability of his property portfolio.
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Here are further questions I asked my landlord client to consider during our phone call consultation:
Question: Have all items of expenditure on the improvement of an asset been treated correctly?
I reminded my client that when work is carried out to an existing or newly-acquired property which results in the asset being altered, improved or upgraded – that is, makes it better than it had been before – then such costs are normally capital and should be disallowed in computing the rental profit or loss for tax purposes.
Where any unintentional improvement arises due to the use of new materials, which are broadly equivalent to the old materials, the cost normally remains revenue expenditure. For example, replacing lead pipes with copper or plastic pipes.
I told him that where work is carried out to repair or refurbish a new or existing property, he should review the expenditure to identify any items that represent improvements rather than repairs.
It is important to differentiate between capital expenditure and repairs. Repairs are allowable as a deduction against rental income, whereas any capital expenditure should be claimed, if appropriate, against any future Capital Gains Tax when the property is sold.
Repair means the restoration of an asset by replacing subsidiary parts of the whole asset. An example is the cost of replacing roof tiles blown off by a storm.
There will not be a repair if a significant improvement of the asset beyond its original condition results – that will be capital expenditure. For instance, there will be a capital improvement if the taxpayer extends the area of the original roof or takes off the roof and builds on another level.
Examples of common repairs that are normally deductible in computing rental business profits include:
- exterior and interior painting and decorating
- stone cleaning
- damp and rot treatment
- mending broken windows, doors, furniture and machines such as cookers or lifts
- replacing roof slates, flashing and gutters
In these circumstances, I advised my landlord client that the expenditure on repairs remains allowable. Expenditure may be apportioned on a reasonable basis to estimate the amount attributable to the repair.
We wrote an article here about ways that you can reduce your property profits to legally mitigate your tax bill – Article
Question: Have any legal and other professional fees incurred in acquiring an asset been located?
I state that generally fees are capital if they relate to a capital matter, such as the purchase of property.
Therefore, costs incurred in respect of acquiring, adding to or selling an asset are normally capital, for example fees paid to a surveyor/valuer, planning permission or registration of title on a property purchase.
The incidental costs of obtaining finance that are wholly and exclusively incurred for the purpose of acquiring the property are normally allowable, as I reminded my buy-to-let property investor client.
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Question: Has all expenditure on essential repairs to a newly-acquired property been treated properly?
If a property is acquired in a derelict or run-down state and the price paid for the property was consequently substantially reduced, expenditure incurred in repairing it and putting it into a fit state for letting or use in the business may be capital rather than revenue expenditure.
I advised my client to consider the timing and extent of the work carried out on the newly acquired property and any relevant additional factors. I told him to also ensure that any expenditure incurred on repairing the property is allocated appropriately.
Repairs to reinstate a worn or dilapidated asset are usually deductible as revenue expenditure. The fact that the taxpayer bought the asset not long before the repairs are made does not in itself make the repair a capital expense.
But a change of ownership combined with one or more additional factors may mean the expenditure is capital.
Question: If expenditure incurred prior to the commencement of the rental business has been claimed, have all of the conditions been met?
Expenditure incurred prior to the commencement of a rental business is allowable if it is incurred wholly and exclusively for the purposes of the rental business and it is not capital expenditure. In addition, the conditions must be satisfied for the relief to be due on expenditure incurred before the start of the rental business.
I told my client to consider any expenditure on activities that are preparatory to letting.
The date of commencement is a question of fact. Where the rental business is letting property, the business normally begins when the letting of the first property begins and not on the date the property is purchased.
Relief may be due on expenditure incurred before the start of the rental business if it satisfies all of the following conditions:
- it is incurred within a period of seven years before the date the rental business is started.
- it is not otherwise allowable as a deduction for tax purposes.
- it would have been allowed as a deduction if it had been incurred after the rental business started Qualifying pre-commencement expenditure is treated as incurred on the day on which the rental business commences.
These factors can cause a significant change in the profitability of an investor’s property rental incomes.
Next week, I’ll be looking at further considerations in maximising property rental incomes in the UK.
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