Property Blog Series: Episode 2 – Property Ownership

Accounting for your property

The first blog in our property series looked at tax considerations of running a property business and your personal filing requirements as a landlord. 

We will now look at the accounting for your property business and allowable expenses for tax.

What income do I need to declare?

To determine your taxable profits on which you will be taxed, it is important to understand tax accounting.  When accounting for property income and expenses you will likely be required to use the ‘cash basis’ method rather than the previously required ‘accruals basis’ method. 

  • Cash basis means that you account for income received and expenses paid in the tax year regardless of the period they relate to. 
  • The accruals method requires you to account for income and expenses due, but not necessarily paid, in the tax year i.e. rent due in March 2019 but not actually paid until May 2019 would be taxable in the 2018/19 tax year.  Therefore it is necessary to recognise money owed and owing (debtors and creditors) and expenses relating to different accounting periods.

All landlords need to use the cash basis, unless you make an election to use the alternative method, or you meet certain conditions. For example, if rents are more than £150,000 or the property business is carried out by a company or a partnership. Cashflow and expenses should be considered when decided to make an election to use the alternative method.

MHA Tait Walker can provide more information on the conditions if required.

What expenses can I claim?

When you work out your taxable rental profit, you can deduct allowable expenses from your rental income. The expenses must be wholly and exclusively for the purpose of renting out the property so you can’t claim for personal expenses.

Anything of a capital nature i.e. putting a new roof on the property, is not allowable either. The main deciding factor in determining if an expense is capital is if it is a ‘like for like’ replacement or an enhancement to the property.

Capital expenditure can be a contentious area; something one person deems to be an improvement may actually be allowable for income tax. A good example of this would be a new kitchen to replace an old kitchen. The materials may appear to be an enhancement or improvement, but this is merely because of modern equipment used where there is no alternative. If the new kitchen is of the same standard, size and layout as the old kitchen, the incurred costs will likely all be allowable. If you were extending the kitchen and upgrading the style then this would likely be capital expenditure and not allowable for income tax.

Capital costs will be taken in to account when the capital gain is realised on the sale of the property.

Types of expenses

Maintenance & Repairs 

Maintenance and repair expenditure are typically the most common expenditure, and the definition of a repair is simply restoring an asset back to its original condition. This can sometimes mean replacing items. For example, replacing a broken door, this would be classed as an allowable maintenance and repair cost.

A point to note is should you have a landlord insurance policy in place covering the cost of some repairs to the property, expenses can only be claimed on additional repairs not covered by your insurance. 

Replacement of domestic items relief 

‘Replacement of domestic items’ relief replaced the ‘wear & tear’ allowance and is available to all landlords of residential property, regardless of whether their property is furnished or not (previously you could only claim ‘wear & tear’ on furnished lettings). It applies to moveable furniture, furnishings, kitchenware and household appliances, and allows you to claim a deduction against your tax liability equivalent to the cost of the replaced item. 

Mortgage Interest Relief Restriction 

On 6th April 2017, HMRC introduced new restrictions on mortgage interest relief on residential properties. As an individual landlord, mortgage interest is now restricted to basic rate (20%) income tax reducer and this will be phased in over four years from April 2017 as follows:

Year% of costs deducted from profits% of costs available as a basic rate deduction
2017/1875%25%
2018/1950%50%
2019/2025%75%
2020/21100%

This has had a major impact on the tax landscape and the way investors are now approaching this change. 

Legal and professional costs

Accountancy fees relating to the property business can be claimed as an expense against your rental income.

Insurance costs

Insurance policies relating to the property business are allowable against income.

This list is not exhaustive, so please contact us if you are concerned about claiming other expenses.

Contact us

At MHA Tait Walker, we have vast expertise and specialists in this area who can answer any queries you may have and help you make the correct decision. Please contact Ryan Keltie on 0191 285 0321 or email ryan.keltie@taitwalker.co.uk.

Other episodes in this series

Episode 1 – Considering purchasing a rental property?
Episode 3 – Owning personally or through a company