In the field of the rental business, whether an expense is tax deductible will very much depend on what it is. However, the ability to deduct expenses in a property business depends on the status of your rental business.
So, what do we mean by the status of the business? Well, when it comes to your rental business, HM Revenue & Customs will class it into these categories:
- Let on a commercial basis.
- Let on an uncommercial basis.
- Used for personal occupation.
- Temporarily vacant
- Ceased trading as a landlord.
These classifications are significant because they determine what you can deduct for tax purposes.
Commercial basis
If you are renting out your property for commercial purposes, you will generally follow the standard rules that apply to most landlords.
You will normally deduct expenses such as mortgage interest, repairs, and other such tax deductible expenses
However, there may be times when you may deviate from commercial renting for various reasons. In such cases, it is important to understand which expenses related to your property business are tax deductible.
Let’s delve into the deviations and see how they impact the tax deductions of your expenses.
‘Uncommercial’ letting
A property is let on an uncommercial basis if the rents charged are less than full market rent
If a property is rented out at less than market rent, you can only deduct expenses up to the amount of rent you receive. This means that you cannot create a loss with regard to that property.
However, this rule doesn’t apply to properties that are rented out for free. If you don’t receive any rent, then special rules apply!
Any expenses related to the property will not be considered as incurred solely and exclusively for business purposes and will hence be disallowed. So basically, even if you have a genuine expense such as say repairing the front door, you will not get any tax deductions.
It makes sense though, right? After all, the property is being rented out for non-commercial purposes.
Property is used for personal occupation
Expenses that are incurred while using a property for personal reasons cannot be deducted as they are not related to business purposes. Again personal use is not commercial business.
However, if you can identify and calculate the business-use portion of the expense, then that portion can be treated as tax-deductible.
Suppose you rented out a property to tenants for five months and used it for personal purposes for seven months during a twelve-month building insurance policy period.
In such a scenario, you can apportion the cost of the policy based on the time it was used for business purposes, i.e., 5/12.
This apportioned cost can then be claimed as a deductible expense.
Your property is temporarily vacant
Did you know that you can deduct expenses incurred during a temporary vacancy period of your property? This means that you can reduce your tax liability by deducting expenses such as mortgage interest, insurance, and repairs during the period of vacancy.
Taking advantage of this deduction can help you save money and make the most of your investment property.
Sometimes, it can be challenging to distinguish between a temporarily vacant property and a lettings business that has permanently ceased. It’s crucial to differentiate between the two since the rules for post-cessation expenses apply if the business has ceased (please see below).
In the property income manual, HMRC say that if the rental business consists of letting a single property, it will not normally cease just because the tenant quits and the property is empty while the landlord is looking for a new tenant.
HMRC also says that, in practice, they will not normally suggest that the old business stopped where the gap is less than three years and the customer was trying to continue.
The property business has ceased
When a rental business disposes of its last property or repurposes it, the business typically ceases.
But it is possible to deduct post-cessation expenses if they would have been allowable had the business continued.
For instance, you can deduct expenses such as the cost of background heating for empty premises to prevent condensation and maintain the value of the property for later sale.
In addition, relief for certain post-cessation expenses such as bad debts and legal fees can be claimed if they were incurred within seven years of the business ceasing.
More information on post-cessation receipts and expenses can be found here
Further information
At Myers Clark, we have a wealth of experience working with landlords. If you need help look at how we support landlords. We will be happy to help you make sense of what can sometimes be a tricky situation to navigate. Deciding what expenses are tax deductible for your property business is not always straightforward.