Running a buy to let or holiday let as a business means watching the expenses as well because savvy landlords know that every £1 that goes through the books as a business expense means paying less income tax.
So What Can I Claim For?
Despite this motivation, understanding how to claim business expenses is one of the biggest bugbears for landlords and, to be fair, many accountants. Often, the first move for a landlord is asking where to find the list of business expenses approved by HM Revenue and Customs.
The bad news is there isn’t one!
The good news is a property investor can claim any business expense whatsoever, providing the money is spent on a day-to-day running cost and the expense is incurred ‘wholly and exclusively’ for the business.
Break this down into two parts:
- A day-to-day running expense is a regular cost like building insurance, mortgage interest, letting agent fees or repairs.
- ‘Wholly and exclusively’ is harder to pin down as tax experts have written whole books on the topic. For instance, paying the letting agent every month is a ‘wholly and exclusive’ expense for the business because the management bill would not exist if the property was not let through the agent. The same goes for mortgage interest on a loan to buy the letting property.
Other expenses are harder to pin down.
Take a landlord wanting to claim some costs of running a car for a property business but also drives the car for work and private trips.
Our landlord is quite right to deduct a portion of the motor expenses for spending that is identified as ‘wholly and exclusively’ for business. This tax treatment of business expenses is called ‘apportionment’. Basically it’s a technical term that means splitting an expense in to business and private use.
The principle is simple – our landlord spends £5,000 a year on running a car. This includes tax, fuel, servicing, insurance and finance costs. The total mileage for the year for all trips is 15,000 miles – but only 2,000 are claimed for property business trips.
The ‘apportioned’ cost for the property business is 2/15 of £5,000 or £666.66. In this case, it’s the amount divided by total miles multiplied by business miles or (5000/15000) x 2000.
This example shows the ‘wholly and exclusively’ rule in action –
- The rule bars claiming any expense that is not business related.
- Any expense that is 100% business related can be claimed in full
- Any expense that is measurable – like the 2,000 out of 15,000 miles above – is claimed pro rata in the accounts.
Another pro rata or apportioned expense is a personal phone occasionally used for business. If the business calls are 20% of the total cost of calls, then claim that amount against the property business.
Don’t forget the ’wholly and exclusively’ rule bars any expense that is not business related, so costs like line rental for a phone are excluded because they are personal.
Pay less tax by running the ‘wholly and exclusively’ rule against every property business expense to maximise claims – if you are a lower rate taxpayer, you save £20 income tax for every £100 of expenses and £40 for every £100 as a higher rate taxpayer.