Reclaiming tax on allowable expenses

In this guide

Claiming expenses is one of our most popular tax topics. In this chapter we look at the differences between capital and revenue expenses.

What is an expense?

Expenses are costs you incur from running your business. In property, they include things like painting and decorating, and maintenance costs, such as replacing a boiler.

HMRC rules are clear on this: a business expense must be 'wholly and exclusively' incurred as part of the day to day running of your business.

Expenses can be offset against profits, reducing the amount of tax you’ll pay, therefore it’s well worth recording and claiming all legitimate expenses.

One thing we’re often asked about is whether a cost is classed as a capital expense or a revenue expense.

What is a capital expense?

A capital expense is a cost incurred to buy and upgrade the property.
Capital expenses can be deducted from the gain (or added to the loss) when selling a property.

Here are some typical capital costs that can be claimed when selling a property.

Capital expenses	Description
Property purchasing expenditures	Including solicitors costs and survey costs from when the property was initially purchased.
Stamp Duty Land Tax	From when the property was initially purchased.
Property enhancement	Value added to the property, such as building an extension, adding an en-suite or reconfiguring the layout.
Estate agent fees	From selling the property.

What is a revenue expense?

Revenue expenses are costs incurred as part of the day-to-day maintenance of the property.
They can be deducted from the gross profits at the end of the tax year to arrive at the net profit.

Here are some typical revenue costs that can be claimed at the end of the tax year.

Revenue expenses	Description
Property repair, replacement & maintenance	Such as kitchen & bathroom fittings, windows, doors and boilers. (Must be like-for-like replacements. For example, any substantial upgrade in the kitchen or bathroom would be seen as a capital upgrade.) Also includes maintenance costs, such as cleaning and gardening.
Property business management costs	Including business insurance, accountancy fees, advertising, letting agent fees, membership charges of landlord/property associations, and stationery.
Furniture purchase	If replacing furniture already in the property when purchased.
Travel, hotel accommodation, food & drink	Whilst away on business/visiting properties. Mileage is 45p per mile for the first 10,000 miles per tax year and 25p per mile for all miles thereafter in a car. These expenses are only claimable for yourself and your employees.
Legal fees	Including those associated with mortgage/re-mortgage arrangement costs. Also includes extending leases of up to 50 years, preparing contracts and preparing deeds of trust.
Computer & mobile phone costs	If an expense, such as a mobile phone, laptop or tablet, is not used 100% of the time for running the property business, a proportion of the cost can be claimed.
Utility & Council tax costs	Utilities (water, electric and gas) and council tax can be claimed if the property is empty.

Pro Tip

Record your expenses as they happen so you have an accurate set of accounts. Provestor’s property accounting software lets you do this in real-time.

Non-deductible costs

The following costs cannot be claimed as an allowable expense.

Non-deductible expenses	Description
Property purchase costs for aborted deals	For example: legal costs, mortgage arrangement, travel costs etc. for properties either not purchased or rented.
Mortgage capital repayments	Only the interest element of a mortgage can be claimed, not the total repayment cost. There are different rules for landlords who personally own residential property when it comes to claiming mortgage interest due to the section 24 tax change.
Furniture purchase	If not already in the property at purchase.

Mortgage interest costs

The treatment of mortgage interest cost varies between personally owed and limited company portfolios.

As a limited company, your mortgage interest is viewed as a business expense which can be deducted from your total amount of taxable profit, reducing the corporation tax you’ll pay.

For personally owned portfolios, you'll need to consider Section 24, which means you can only claim 20% of the mortgage interest as an expense.

Section 24 mortgage interest relief

If you personally own a residential buy-to-let property, you will be impacted by “section 24” tax changes, which increased the amount of tax you pay on your rental income.

From April 2021, income tax relief landlords receive for residential property finance costs (mortgages) was restricted to the basic rate of tax.

This means that the amount of income tax paid on rental income will increase as a result, particularly if you become a higher or additional rate tax payer.

As section 24 doesn't apply to limited companies, more higher-rate taxpayers are now using limited companies to manage their tax liabilities.

Allowable expenses and navigating section 24 can be a confusing and complex area for many landlords. If you're unsure about whether a cost can be claimed, ask your accountant or book a consultation with one of our property experts.

Start up with Provestor

We hope this guide has been a useful introduction to property tax.

Whenever you’re ready, here are 4 ways we can help you start and manage your buy-to-let portfolio:

Tax Advice. Talk through your situation and increase your confidence by booking a tax consultation with our Chartered Property Tax Advisors.
Company Start Up. For a smooth start and to avoid costly mistakes, our expert team can incorporate your limited company, for less than you think.
Accounting Tax App. Keep on top of your finances in minutes, and prepare and directly submit your accounts and tax returns, with our easy-to-use property accounting app, designed specifically for landlords.
Advisory Service. As your portfolio expands, the complexity of your financial needs grows too. Provestor’s Advisory Service is the next step for investors seeking a deeper level of support and tax expertise.

Pro Guide:

An Introduction to Property Tax

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