Claiming property business expenses to pay less tax is a problem for landlords.
If you do not know what expenses to claim, don’t bother phoning the tax man to ask because he won’t tell you.
If you ask for a list of typical property expenses, he will say there isn’t one.
So how do you know what business expenses you can claim for a rental property business?
Despite what the tax man says, the HM Revenue & Customs web site has a list of expenses regularly claimed by landlords.
You can see the list in the tax man’s own Property Income Manual, the manual is internal guidance for tax inspectors and goes through tax for property people step-by-step, explaining HMRC’s interpretation of the rules.
Don’t forget as the manual is HMRC’s interpretation of the law and is often overturned in tax tribunals or court.
Property business deductions, which are expenses you can set off against rental profits, are important for the money-saving landlord who wants to pay less tax.
Every pound of expenses knocks a pound off taxable profits – that’s a saving of 20p tax for every pound of expenses for a basic rate taxpayer and doubles to 40p in the pound for a higher rate taxpayer or 45p for a top rate taxpayer.
Popular claims include mortgage interest, letting agent fees, repairs and business administration costs.
If you want to argue a point about a business expense with the tax man, the place to start is the Income Tax (Trading & Other Income) Act 2005 (ITTOI).
The legislation explains in plain English precisely what a landlord can and cannot claim as a business expense without specifically mention a single one!
Any good accountant or tax adviser will always go back to the legislation and any case law to support an argument with HMRC.
This involves putting together a checklist of ‘points to prove’.
If your argument checks every points to prove box, then the tax man cannot argue your claim – the problem comes with the unticked boxes.
Section 34 of ITTOI is the key, saying that any expense is allowed providing:
- The money was spent wholly and exclusively for the business
- If the expense was not entirely for the business, you must identify a proportion that was for a successful claim
The other points to prove to pay less tax are the expense was not capital and the claim is the only one for this expense. The same rule applies to sole traders, partnerships or companies.