Most expenditure relating to the initial purchase and the ongoing costs of letting the property is deductible for tax purposes in one form or another i.e. for one tax or another. Typically expenditure is split into three categories.
Revenue Expenses – Income Tax
An investor is liable to income tax annually on the net rental income derived from a rental property. In calculating the net income, a tax deduction is allowed for certain revenue expenses
The following are examples of the type of allowable rental expenses that may be claimed for:
- Water rates, Ground rent, Service charges, Waste Collection charges etc
- Insurance costs
- Management & rent collection costs
- Advertising costs
- Legal fees relating to drawing up of leases or collection of unpaid rent
- Accountancy fees relating to rental income
- Mortgage Interest paid “on monies borrowed for the purchase, improvement or repair” of the property (restrictions apply)
- Repairs, decorating and General Maintenance
- Cleaning & related costs
- Local Authority Property Registration Fees
These costs can be used to reduce your taxable rental income, hence it is imperative that you keep a record of the amounts paid for goods or services.
Capital Expenses – Income Tax
No deduction is given for income tax purposes for capital expenditure but an allowance is given for the cost of furniture etc. by way of capital allowances. These costs are written off over eight years at a rate of 12.5% of the original cost of the assets per annum.
Capital Expenses – Capital Gains Tax
The initial capital expenditure – cost of property plus related acquisition costs (solicitors fees etc.) and subsequent capital improvements to the property e.g. an extension are deductible for capital gains purposes on any eventual sale of the property.
Whether an item is capital or revenue expenditure can at times be a grey area. Care should be taken and each item of expenditure examined separately to determine if it is allowable as a deduction.
In addition, no tax deduction is given for pre-letting expenditure e.g. interest costs before property is let.