One area that often causes confusion for landlords is distinguishing between allowable expenses and capital expenditure. Each category has distinct implications for your tax liabilities, so understanding the difference is essential to effectively manage your finances.
Updated in September 2024, here’s everything you need to know about the current tax laws for landlords.
What taxes do landlords have to pay?
As a landlord, you will have to pay tax on every stage of your investment. From buying the property, to letting it out, and later when you sell it or pass it on.
Stamp Duty is payable to anyone who buys a property over a certain price, but if you let out a property that is not your primary residence, then you are also liable to pay Capital Gains Tax and Income Tax.
Related: Will I pay Stamp Duty for my buy-to-let?
Allowable expenses
Allowable expenses are costs that you can deduct from your rental income when calculating your taxable profit. These expenses are typically incurred in the day-to-day running and maintenance of your rental property. Here are some common examples of allowable expenses:
- Repairs and maintenance: This includes costs for repairing and maintaining the property, such as fixing broken windows, repairing plumbing, or repainting walls.
- Utilities: You can deduct costs for utilities like gas, electricity, and water that you pay for as a landlord.
- Insurance: The premiums you pay for buildings, contents, and landlord liability insurance are allowable expenses.
- Letting agent fees: Any fees you pay to a letting agent for finding tenants or managing the property are deductible.
- Council Tax: If you as the landlord are responsible for paying Council Tax, this can be included as an allowable expense.
- Advertising costs: Expenses related to advertising the property for rent, such as online listings or newspaper ads.
- Interest on mortgages: You can claim relief on the interest portion of your mortgage payments, though this is currently subject to changes in tax law.
Related: Understanding council tax bands: How they affect property prices
Capital expenditure
On the other hand, capital expenditure is money spent on improving or enhancing the property beyond its original condition when you purchased it. These costs are not deductible as allowable expenses in the year they are incurred but are instead added to the property’s capital value. Here are examples of capital expenditure:
- Improvements: Significant renovations or improvements that enhance the property’s value or extend its life, such as adding an extension or installing a new bathroom.
- Replacing assets: The cost of replacing an entire asset, like replacing a central heating system or upgrading the property’s wiring.
- Initial furnishings: The cost of furnishing a property when you first let it out is considered capital expenditure, not an allowable expense.
Key considerations
Tax treatment
Allowable expenses are deducted from your rental income in the year they are incurred, reducing your taxable profit. Capital expenditure is not deducted immediately but may be eligible for capital allowances or included in the Capital Gains Tax calculation when you sell the property.
Documentation
Keep thorough records of all expenses and receipts to substantiate your claims in case of a tax inspection.
Seek advice
Tax laws can be complex and subject to change. Consider consulting with a tax advisor or accountant who specialises in property to ensure you are maximising your tax efficiency and compliance.
Contact your local Martin & Co branch today for expert advice and guidance.
