As a landlord running a property business in the UK, it’s crucial to understand which expenses you can claim as deductions when calculating your taxable profits. This knowledge not only ensures you’re not overpaying tax but also helps you avoid unwanted scrutiny from HMRC. Let’s break down the key points you need to know about claiming expenses for your property business.

The ‘Wholly and Exclusively’ Rule

The cornerstone of expense deduction for property businesses is the ‘wholly and exclusively’ rule. This principle, borrowed from trading income rules, states that an expense is only deductible if it’s incurred wholly and exclusively for business purposes. In other words, personal expenses cannot be claimed as business deductions.

To ensure compliance with this rule:

1. Maintain separate bank accounts for personal and business transactions
2. Keep all receipts and invoices related to your property business
3. Maintain accurate and detailed records of all business-related expenditure

Dealing with Dual-Purpose Expenditure

Sometimes, an expense might serve both personal and business purposes. In such cases, you must clearly identify and separate the business element to claim a deduction. A classic example is everyday clothing worn for work – unless it’s uniform with your company name or logo, it’s not deductible as it also serves the personal purpose of providing warmth and decency.

The Art of Apportionment

When an expense clearly has both personal and business elements, you can apportion it and claim the business part as a deduction. This apportionment must be done on a ‘just and reasonable’ basis.

Common examples of apportionable expenses include:

1. Car or van usage
2. Mobile phone bills

For instance, if 25% of your car mileage relates to your property business, you can deduct 25% of the running costs when calculating your business profits.

Common Deductible Expenses

While expenses can vary between landlords, here are some common deductible expenses:

• Advertising costs
• Bad and doubtful debts
• Insurance premiums
• Repairs (not improvements)
• Council tax
• Employee salaries and related costs (National Insurance, pension contributions)
• Travel expenses
• Accountancy fees
• Cleaning and gardening costs

It’s important to note that legal and professional fees are only deductible if they are revenue in nature. For example, fees for evicting an unsuitable tenant would be deductible, but fees related to purchasing or selling a property are capital expenses and not deductible.

Interest and Finance Costs: A Special Case

The rules for deducting interest and finance costs depend on the type of property:

1. For commercial properties and furnished holiday lets, these costs are fully deductible.
2. For residential lets owned by unincorporated landlords, interest and finance costs cannot be deducted directly. Instead, relief is given as a tax reduction of up to 20% of these costs.
3. Corporate landlords can still deduct these costs for residential lets.

Understanding Capital vs Revenue Expenditure

Remember, the rules we’ve discussed apply to revenue expenditures—the day-to-day running costs of your property business. Capital expenditures, such as buying property or making significant improvements, are treated differently. The tax treatment of capital expenditures depends on whether you use cash or accruals as a basis of accounting.

Understanding allowable property business expenses is crucial for tax efficiency. Keep detailed records, know the ‘wholly and exclusively’ rule, handle dual-purpose expenses, and consult a tax professional when in doubt.