The press were quick to point fingers when homelessness charity Shelter revealed that landlords ‘enjoyed a record £14bn of tax breaks in 2013’. What many of the papers neglected to consider, however, was the wide array of additional costs, laws and complications that landlords have to contend with every year.
Of all the standard business accounting issues that affect landlords, allowable expenditure is perhaps the most confusing.
In general, landlords' expenses are tax-deductible as long as they relate only to the property business and aren’t of a capital nature (i.e. don’t relate to the acquisition of fixed assets). However, restrictions apply when any part of the property is used privately, isn’t available to let, or isn’t let on a commercial basis. Landlords may claim for expenditure incurred for upkeep of a property before being let, but only once letting commences, and only if the work took place less than seven years beforehand.
The complex nature of these clauses and caveats means that lengthy checks are required every time there’s a change of tenants, which is particularly problematic for landlords in the UK, where tenants move much more frequently than in the rest of Europe.
The line that separates standard allowable (revenue) expenditure from capital expenditure can be particularly blurry in the property industry. When making improvements to a property, for example, the difference between repairing (a revenue expenditure) and upgrading (a capital expenditure) is often far from clear.
Furnishings and white goods bought for the use of tenants in buy-to-let properties are not counted as capital expenditure unless they're bought for a holiday home. There is, however, a 10% ‘wear and tear allowance’ on furniture bought for residential property that provides some recompense.
The way in which rental income is treated is another particularly problematic area for landlords.
Renting out property is considered a business, and rental income is therefore taxed under income tax rules, with mortgage interest allowed as an expense (even though furniture isn’t).
However, gains made from increases in property prices are also subject to Capital Gains Tax, meaning landlords are effectively taxed twice for their business, without being given the roll-over relief extended to other businesses since ‘taper relief’ was removed in 2007.
This not only hits buy-to-let investors when they realise their assets, it skews the calculations made by professional landlords when selling a property to invest in another.
Changing rules and regulations
More broadly, we’re inclined to believe that landlords are all-too-often used as political footballs, kicked back and forth between those who see the need to stimulate UK business and the property market, and those who see landlords as a threat to UK home-ownership. It’s a situation that inspires knee-jerk political reactions like the abolition of the Landlords Energy Savings Allowance, and it’s not sustainable.
Until we see more consistency in the way landlords are treated, and a limit placed on the volume of caveats and clauses attached to tax laws on commercial and buy-to-let properties, tax will remain taxing for landlords.
If you need help in maintaining you cash flow or with commercial rent arrears, contact us today.