Can anyone help with Buy to lets and what is an allowable expense.
I am trying to find out if the initial cost, solicitors, stamp duty, mortgage set up fee etc can be set off against the rentable income for tax purposes.
I know that Mortgage interest, insurance, letting fees, use of home office in running the business etc are all tax deductable but not sure about the set up fees.
I have been trawling the internet for hours and have found as many people saying yes as saying no, some say they are part of the capital expense so cannot be deducted but can be used in the calculation of Capital gains at time of selling, others say yes they can be deducted. Now I do not know which is correct.
The general principle of the capitalisation criteria per FRS15 (I know SSAP19 applies but bear with me on this) is that all costs incurred in bringing the asset to it current state and location may be capitalised.
Although it's a buy to let it is a business asset the same as if it was a machine churning out widgets.
All costs necessarily incurred in the initial purchase should be capitalised. So that would include the initial cost, solicitors, stamp duty, mortgage set up fee etc.
The loan taken out may include these costs as they were incurred in the intial purchase of the asset so the interest on them is an allowable business expense.
A quick proviso here. If the costs are capitalised then they should be consistently capitalised across all properties of the same type. Ok that's the theory, now the reality. People purchase buy to lets using the maximum amount of mortgage that they can get (in cases 100+ % of the purchase price) leaving no room (or even negative room) for capitalising the other bits and you could end up with a capitalised carrying value for the property greater than it's realisable value.
The price recorded for the purchase needs to be the capitised cost regardless of whether such is greater than the realisable value. I assume that this is a furnished let? If so although no capital allowances are available for initial purchase of furnishings, 10% of rental is allowable as an allowance for wear and tear.
The alternative treatment to this which must again be applied consistently is deduction for the full cost of replacement items as and when they wear out. (not to be confused with their being any allowance for initial purchases which there are not).
Quite happy for anyone to disagree with me as it's three years since I sold my last buy to let so matters may have changed.
Also, might be worth mentioning to your client that taper relief no longer exists for buy to lets. A lot of people haven't cottoned onto this. Unless we are talking about a serious business where this is the primary source of income and there are multiple rental properties involved I would be very wary about giving any allowance for use of home as office. Also just did a quick search and this page came up :
Looks as though there are some pretty good pointers in there to win you brownie points with your client.
Hope that this helps,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Thank you for this although you may have to forgive me for needing clarification on your answer.
A bit of background, it is actually my buy to let that I am talking about although I do have a client that has buy to lets and I may have to deal with these in future, but this question is aimed at my own.
I have two properties, both unfurnished, with mortgages of 75%. Obviously there is no money in buy to lets at the moment except as a long term investment, so I do not plan on selling them for many years.
I think your answer and the website that you provided (thank you for this) is aimed at CGT which would come in at point of sell but I wanted to know whether I can claim any of the set up costs as a allowable expense to offset against my rental income.
I think, and please forgive me if I have got this wrong, because I can capitalise these costs then I cannot claim them as allowable expenses. Have I understood this correctly??
Sorry to need clarification but your answer lost me a little bit.
Its interesting what you said about the office, so I probably cannot claim anything for the time that these properties have cost me in admin?
One website said that I can allow for the morgage set up fee but not the stamp duty, is this the case?
I certainly don't want to claim for anything that I shouldn't but on the other hand I know many people who have buy to lets and the IR knows nothing about these, I am not one of these people but do want to get my figures right.
The profit made will not cover any accountants fees, my morgage advisor said that I can offset these costs so even the professionals seem to have different views.
Thank you for taking the time to reply Shaun but could you just clarify the above points again.
Stamp duty cannot be claimed as allowable expense as they are classed as capital expenditure, together with solicitors fees etc.
I would, however, class the fees on the mortgage as allowable, including any fees that are for new mortgage deals etc when/if you have them on fixed rate deals etc. IMHO.
Most of the info from P at the back office group also adheres to my original message.
I disagree on his treatment of mortgage fee's bit only in that they are part of the cost of bringing the asset to it's present location and condition and should therefore be capitalised rather than expensed.
I think that this is one of those area's that providing that you apply your reasoning consistently across the properties then it would be allowable to expense it even though that's not the path that I would take.
In answer to your question, yes. If you capitalise then you can't also expense.
Note that a furnished house doesn't have to be fully furnished. If it's got carpets and a few basic items of furtniture then 10% of the rent is an allowable expense for wear and tear regardless as to whether you actually replace anything.
Well done on being open and above board about it. You're right, there are a lot of people who don't admit to having rental properties and they're all on borrowed time as it's a revenue bugbear.
You may find that your buy to let mortgage provider contacts you and asks to see a copy of the relevant part of your self assessment tax return to ensure that you are declaring this as a business. I know that Yorkshire bank and Clydsdale bank both do that. Not sure about the others.
The fact that you have multiple rental properties does make it a business but I assume that you are also working from home as a bookkeeper? You can only claim for home as office once and I'm guessing that you're already doing that.
One of the best places to get a good feel for what's allowable and what's not is the self assessment return and associated explanatory notes. Basically if you claim the 10% of turnover (not profit) you can claim very little else but generally you come out of it more profitable... Plus the revenue like it better because it's simple.
Hope that this helps,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Hi Shaun, yes this helps a lot, thank you. And thank you back office for your advice also.
I think I am clear now on what I need to claim, I think I would rather capitalise the mortgage fee as this could be more beneficial for me later when I need to consider CGT.
As for office expenses, I was not set up as a bookeeper for the tax return I am doing and therefore have not claimed any office expenses. I wonder if I could still therefore claim something for the buy to let admin, even if its only £1 per week, every bit helps and I don't think the IR will quibble this amount. I won't do it for this year as I will be claiming home expenses as a bookeeper.
As for furnishing, the properties only have carpets, no furniture, so I don't think an allowance is worth it.
As I stated before, this is personal but I do have a client that may want me to look after his buy to lets so I thank you for your advice, It has been very helpful and I am always amazed that one is always learning something new so thank you for expanding my knowlegde.
Although not strictly buy to let, my son and wife have reclocated and, because of the state of the housing market and their need to move quickly for work, they have let their home and rent one at their new location. I am sure it will be down to me to sort out the self assessment for him next year and I'd really only thought as far as taking the rent as income with letting agent fees, mortgage interest and any repairs as expenses with any balance being taxable. Am I correct in this, or is there anything else I should take into consideration?
also remember that if you do buy another property using money gained from remortgaging the rented property, then the interest on this portion can also be claimed against the tax.
as said before, if part furn then the 10% allowance can be claimed also.
also, its not just for but to lets, but any income derived from property rental - you could have let to buy, rent a room etc etc
hope that helps. the easiest way is to look at the notes for completing the property pages on the SA to get a good idea of what else you can claim for.
