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Over the past couple of years there have been a number of changes that will create a lasting impact on property landlords, from both a tax perspective and practical areas such as increased compliance with health and safety.  Many landlords are now trying to make a decision as to what to do with their property portfolios and could well be making bad choices, as they are not aware of all of the options.

Here at Haines Watts we have been helping our property landlords to take stock of these changes, and revisit the short and longer term plans of the property portfolio to ensure it is structured in the most tax efficient way.

Changes to the deductibility of mortgage interest

The recent change to the deductibility of mortgage interest has prompted landlords to address their property portfolio but when we have been reviewing some landlords positions, it is the capital gains tax and inheritance tax position that has much more significant tax liabilities by being overlooked.

Over the coming months we will be sharing a series of blogs around investment property businesses to help landlords review their portfolio and ensure they are getting best advice.

As with most things, it’s good to ensure that the basics are in place.  So, below are my first set of tips on allowable property expenses.

What tax deductions can I claim on my investment property?

There is very little expenditure which is disallowable, so keep all receipts!

When a landlord makes a capital improvement to a property such as an extension, it should still be an allowable expense,  but only when the property is sold. It is therefore allowable as enhancement expenditure against any capital gain. If in doubt, keep all receipts and pass these to your business advisor, so that they can talk through with you what is a repair and capital.

Replacement Bathrooms and Kitchens

New bathroom or kitchen fittings may be better than the originals however, if they are of a similar standard to those originally fitted, they are generally accepted as a repair against the property business income. This might become capital expenditure if you are replacing a tired kitchen like for like, and you add some extra fixtures, perhaps increase the storage in a kitchen, then this would be a capital improvement.  Such improvements do not make all of the expenditure capital, but only the additions made, the rest would be revenue.

Necessary isn’t always automatically allowable

Even if it is required for legal purposes, if there is an improvement increasing the capital value, a landlord may have to wait many years before such relief is useful. Be careful of the impact of the licensing regime for a house of multiple occupancy (HMO). Ordinarily the replacement of fire safety features and alarms would be an allowable property expense for a property business however, when additional safety measures are put in place to meet with this new regime it’s deemed to be an improvement to the investment property.

The fact these measurements may be required to get approval for letting the building would makes no difference to their tax treatment.

Changes to practises and technology

As improvements are made to the quality of items for health and safety purposes, such expenditure incurred does not necessarily make it capital. For example, replacing old electrical wiring and adding more electrical sockets to meet safety standards may all follow this rule and would be classed as repairs. 

Claiming tax deductions on investment property

Landlords need to be mindful of these rules to ensure they get the capital or repairs treatment correct, as these can have a significant impact on their cash flow. Importantly, any expenditure deemed to be capital should be recorded and receipts retained to offset against any future disposal. For support in deductible expenses for investment property, please find your local Haines Watts office and we will happily work with you to understand the most suitable options for your portfolio.

Our next property blog will focus on the deductibility of raising finance for property and the mortgage interest restrictions.  As landlords look to complete their 2017/18 property expenses tax returns they will start to see the impact this change has made.


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