Landlords miss out on potentially thousands of pounds of tax relief because they do not understand the rules about claiming pre-letting expenses for repairs before renting out their first buy to let property.
The subject can even confuse accountants and tax inspectors who routinely turn down legitimate expense claims from landlords.
The root of the issue is tax rules say a letting business only starts from the first tenancy agreement starts.
However, in the months leading up to that date, the landlord can invest significant money in preparing the property to rent as well as the purchase costs.
Tax law says pre-letting expenses can be reclaimed – providing they are repairs and maintenance and not improvements to the property.
The first are revenue expenses, which can be set off against rental profits, while the others are capital costs that are allowable expenses to balance against capital gains when a property is sold or gifted.
Pre-letting expenses can be claimed providing:
- Goods were bought within seven years of the date of first letting
- Services were bought within six months of the date of first letting
- The expenses have not been claimed against tax before
Landlords can put them through their accounts on the date of first letting as if they were expenses made on that day.
Revenue expenses would cover refurbishing the kitchen or bathroom, cleaning carpets or commissioning a gas safety certificate.
Significant building works to bring the property up to scratch are more likely capital spending than revenue costs.
The questions the tax man will ask is was the expense down to repairs and maintenance rather than an improvement and when the money was spent.
Providing the answer to the first is ‘yes’ and the second fits the date of first letting time limits, then the expense is allowed.
The relief is claimed when submitting a self-assessment tax return by entering the pre-letting expenses as repairs against rental income.
If the total pre-letting cost is more than the rental profit in the year, the balance is carried forward to set off against the following year’s profits until the whole amount is used up.