PIM2015 - Deductions: general rules: main types of expense

This page gives a broad outline of the tax treatment of some of the expenses that may be incurred in a rental business. For detailed guidance about expenses that could also be incurred in a trade refer to the Business Income Manual.

Expenses connected with the premises or land that is let out will normally be allowed as a deduction unless the expense relates to a capital matter. Normal principles apply, such as the ‘wholly and exclusively’ rule - see PIM2005 - PIM2010. Examples of types of expense include:

Advertising expenses	See (1) below
Bad and doubtful debts	See (2) below
Cash back on loans	See (3) below
Common parts (cost of)	See (4) below
Criminal payments, bribes and blackmail etc	See (5) below
Draught proofing	See (10) below
Entertaining expenses and gifts	See (6) below
Fees for loan finance etc.	See (7) below
Fines for breaking the law	See (8) below
Foot and mouth disease	See (9) below
Insulation for hot water systems	See (10) below
Insurance	PIM2040
Interest	PIM2100 onwards
Legal and professional costs	PIM2205
Loft, cavity wall and solid wall insulation	See (10) below
Owner occupied property	See (11) below
Premiums paid	PIM2300 onwards
Properties let uncommercially	PIM2220
Providing services (cost of)	See (12) below
Rates and council tax	PIM2030
Rent collection	See (13) below
Rents paid	PIM2025
Repairs	PIM2020
Salaries and wages of employees	See (14) below
Sea walls	See (15) below
Travelling expenses	PIM2210

(1) Advertising expenses

Revenue expenses of advertising for new tenants are allowable; for example, the cost of placing adverts in newspapers. But the landlord cannot deduct the cost if it is capital expenditure; for example, expenditure on permanent signs or other permanent equipment for displaying vacancy details.

The expenses of advertising property to buy or sell is also capital expenditure and not allowable as a deduction for IT purposes. Such expenditure may possibly be taken into account for CGT purposes when the property is sold (for detailed guidance see the CG manual).

(2) Bad and doubtful debts

Bring in as receipts rents etc that were earned in the year even if they were not paid until after the year ended ( PIM1101). A deduction is allowed in respect of:

• a debt which is clearly irrecoverable
• a doubtful debt to the extent it is estimated to be irrecoverable; the deduction is the full amount of the debt less any amount the taxpayer expects to recover

(ICTA88/S74 (1) (j) or ITTOIA05/S272).

The taxpayer can only make a deduction where they have taken all reasonable steps to recover the debt.

The deduction is made in the year the debt becomes bad or doubtful. If the debt is later recovered the taxpayer should bring in the recovery as a receipt of their rental business in the year they get it. Similarly, if they have a doubtful debt which later looks as if it will be good, they should bring the debt back in as a receipt when prospects change.

A deduction cannot be claimed for a general bad debt reserve. For example, a taxpayer cannot deduct 5% of their debts just to be on the safe side. Deductions for bad or doubtful debts must be properly considered and the facts relating to each debtor taken into account. But if, exceptionally, the taxpayer has a large number of tenants and also records that show a stable past pattern, they may be able to calculate with sufficient accuracy the chance that a tenant already in arrears will never pay. A doubtful debt provision calculated on that basis may be deducted.

A bad or doubtful debt can’t be deducted merely because the tenant is always a slow payer. There has to be good reason for thinking the debt is likely to be bad.

A debt can’t be deducted if it has been waived for reasons other than ability to pay. For example, a debt can’t be deducted if it has been waived simply because the debtor is a relative.

A taxpayer may waive rent (payable in advance) before it is due to them because the tenant can’t afford to keep up the payments originally agreed in the lease. Provided the waiver is effective in revising the terms of the lease, the taxpayer will no longer be able to sue for the rent and, consequently, will no longer be taxable on it.

If the taxpayer does not agree to revise the terms of the lease but simply gives the tenant time to pay, they will still be taxable on the rent. But the bad debt rules outlined earlier may apply if there is genuine doubt about the tenant’s ability to pay in the end.

(3) ‘Cash-back’ on loans

A taxpayer may benefit from a ‘cash-back’ offer when they take out a loan. There are many variations and the tax treatment depends on the precise terms of the cash-back scheme. The impact may go beyond the expenses deductions but we have included this subject here for convenience. Broadly, the position on three main aspects is:

• CGT: the cash-back is not chargeable to CGT where it is paid by the lender in return for the taxpayer taking out the mortgage, or other loan, with them,
• IT: where the scheme provides for a one-off payment there is unlikely to be any liability to IT; if more than one payment is involved, there is likely to be an ‘annual payment’ taxable under Schedule D,
• interest relief: where the scheme provides for a discount on the interest due on the loan, interest relief is limited to the net amount paid.

(4) Common parts (cost of)

In a block of offices or flats there may be separate parts of the building that are not let out but are used in common by the tenants. If so, the landlord can deduct expenditure on the upkeep of the common parts from their rental business profits.

However, the deductions for the common parts may need to be restricted if the landlord uses part of the property privately or there are uncommercial lettings, see PIM2220.

(5) Criminal payments, bribes and blackmail etc

A deduction can’t be claimed for payments that are:

• criminal in themselves; for example, a bribe to secure a contract, or
• made in response to a blackmail threat

(ICTA88/S577A or ITTOIA05/S272).
(6) Entertaining expenses and gifts

A taxpayer can’t deduct expenditure on business entertaining and gifts. In the same way, capital allowances are not due on assets used for business entertainment, (ICTA88/S577 or ITTOIA05/S272).

Business entertainment includes hospitality of any kind provided by a business, or by an employee. The person entertained may be a tenant, potential tenant, landlord or any other person.

But an employer can deduct the cost of entertainment (such as meals) provided to their employees as long as the provision for them isn’t incidental to the entertainment of others.

For example, where an employee is provided with free meals, the cost can be deducted. But where an employee takes (say) a supplier to lunch at a restaurant and the employer meets the bill, the whole cost is for business entertainment and can’t be deducted.

Employees may be liable to tax on the benefit they get from entertainment their employer provides and for which the employer gets a deduction in computing their rental business profits. Employers have an obligation to give details of benefits when making their PAYE returns.

(7) Fees for loan finance etc

Costs incurred in obtaining loan finance for a rental business are generally deductible in computing rental business profits provided they relate wholly and exclusively to property let out on a commercial basis (see PIM2005). These costs include loan fees, commissions, guarantee fees and fees in connection with the security of a loan, (ICTA88/S77 or ITTOIA05/S272).

(8) Fines for breaking the law

A taxpayer can’t deduct the cost of a fine incurred as a result of their breach of the law. The fine is not incurred wholly and exclusively for the purpose of the rental business.

The cost of a fine on a rental business employee may be deducted where it is the employee’s liability. Here the employee is taxed on the payment made by the employer as a benefit in kind.

A revenue payment made by a taxpayer in settlement of a civil action arising out of their rental business can be deducted where the allegations were neither admitted nor proved. Where liability was admitted or proved, a deduction is due if the payment was restitutionary (that is, made good the loss to the other party), but not if it was punitive (that is, in the nature of a fine or penalty).

(9) Foot & mouth disease

See TB Special Edition 3 issued on 9 May 2001 for concessional arrangements regarding in particular furnished holiday lettings and waivers of rent.

(10) Loft, cavity wall and solid wall insulation, draught proofing and insulation for hot water systems

This allowance has a limited life. The deduction is available for expenditure incurred between 6 April 2004 and 5 April 2009 on loft and cavity wall insulation. The allowance is extended to solid wall insulation from 7 April 2005 and draught proofing and insulation for hot water systems from 6 April 2006. It is an IT relief and not a CT relief.

ICTA88/S31A and ICTA88/S31B (now ITTOIA05/S312 to S314) were introduced to encourage landlords who pay IT to install cavity wall insulation and loft insulation in let residential property. Expenditure on these items cannot normally be deducted when calculating taxable profits and is not eligible for capital allowances under CAA01. The legislation has been extended to include solid wall insulation, draught proofing and insulation for hot water systems.

A landlord can claim for installing the insulation or draught proofing in any residential property that they let. The maximum amount that can be claimed is £1500 for each building that contains residential property. This is called the Landlord’s Energy Saving Allowance. The Regulations are in SI2004/2664, SI2005/1114 and SI2006/912.

Restrictions

A landlord cannot claim the allowance:

• If they are claiming the rent-a-room exempt amount in respect of the same property.
• If the property meets the qualifying tests for furnished holiday lettings.
• If the expenditure is incurred in respect of the provision of insulation or draught proofing in a residence which, at the time when the item is installed:

• In respect of pre-trading expenditure (see PIM2505), unless the expenditure is incurred in the six months before the rental business is started (and after 5 April 2004).

Apportionment

Suppose the landlord has installed the insulation or draught proofing in a single building that only partly comprises let residential property. Then they should only claim:

• for part of the expenditure incurred, or if less
• for the same part of £1500.

That is the part that relates to the let residential property in the building. The apportionment should be on a just and reasonable basis.

Suppose the taxpayer owns the building with other persons (or the taxpayer and other persons have different interests or rights in the same building). Then the taxpayer should only claim:

• for their share of the expenditure that has been incurred in respect of the let residential property in the building, or if less
• for the same share of the £1500 maximum that relates to the let residential property in the building.

The apportionment should be on a just and reasonable basis.

(11) Owner occupied property

Expenditure on a house, flat or other property that the landlord occupies himself or herself isn’t normally allowed as a deduction in computing rental business profits because it does not satisfy the ‘wholly and exclusively’ rule.

Where a landlord genuinely runs the rental business from home they may claim the extra business costs that they incur - such as the cost of extra lighting and heating.

Where a specific part of their home is used exclusively for running the rental business for a significant amount of time, whether continuously or at particular times, then a proportion of all fixed expenses referable to that room may be deducted. Examples might be rent they pay to their own landlord for their home, repairs, property insurance etc - as well as lighting and heating. But see below where unusually high expenses are incurred.

Similar common-sense principles apply where a landlord lets a part of their home. That is, they need to split expenses between private use and rental use. Periods when their home is unoccupied will normally count as non-business use unless a definite part is set aside to let and they are actively seeking a tenant.

Sometimes there may be general overhead expenses of running a rental business. For example, in a large business employees may repair and decorate both the landlord’s private accommodation and commercial properties while office staff organise the work. An appropriate proportion of both the direct expenses (say the wages of painters) and the administrative staff needs to be allocated to the private work and excluded from the rental business profit computation.

It is impossible to lay down hard and fast rules because circumstances vary enormously. The aim is for the rental business deductions to reflect the commercial use of the property in a fair and reasonable way.

Interest on a loan on landlord’s own home that is partly let

Interest on a loan for the purchase or improvement of a landlord’s only or main residence may also be split in the way outlined in the previous paragraphs. Relief for the business element may then be claimed in computing rental business profits. For more about interest see PIM2100 onwards.

Exceptionally heavy expenses incurred on landlord’s own home

The previous paragraphs explain the usual case where the running expenses for a home remain at about the same level each year. The expenses attributable to the rental business may need to take account of unusual factors in order to produce a fair result.

For example, it might not be fair to split heavy expenditure on repairing a roof in a particular year on a simple time or area basis between the let or office part of the home and the private part if the taxpayer has lived there for thirty years but only let part (or used part as the rental business office) for two years. Here the bulk of the expense on the roof arises out of private use of the house and a further restriction is needed to reflect the true business use of the home.

The adjustment can also work the other way. For example, where the whole property was let for twenty years and the taxpayer has only occupied part for two years. Here it may be fairer to attribute more than a proportionate share of the cost to the rental business.

(12) Providing services (cost of)

As well as renting a property to a tenant a landlord may also provide additional services. They can claim the cost of providing those services as an allowable deduction of their rental business provided the receipts they earn from them are also included as part of their rental business income. See the example of Susan below.

Exceptionally the provision of services can amount to a trade distinct from the rental business. Here neither the income nor the expenditure relating to these services will be included in the rental business. See the example of Clare below.

Example of rental business services

Susan lets out a furnished house. She charges £800 rent each calendar month. Under the terms of the agreement Susan is responsible for cleaning the house and for maintaining the garden. She pays a cleaning agency and a gardener a total of £100 a month for 16 hours general housework and 12 hours gardening every month.

Here the full £9,600 annual rent is assessable as a rental business receipt and the £1,200 for cleaning and gardening is allowable as a deduction in computing the assessable profits of the rental business. The cleaning and gardening does not amount to a distinct trade; they are just ordinary incidents of the letting business.

Example of separate trade of providing services

Clare lets out five furnished flats to tenants on three-year leases. The flats are all in the same building and the lease agreements charge an annual rent for each flat. In addition, she makes a separate charge dependent on the size of the flat to cover the provision of the following services: electricity, gas, hot water and central heating to each flat; the provision of linen and laundry facilities in the basement; weekly cleaning of each flat and of common parts; 24-hour reception and porter facilities and general maintenance of all machinery provided in each flat.

The provision of these extra services (but not the provision of the flats themselves) is agreed with the tax office to amount to a trade. Thus Clare will only include in her rental business the rental income she receives. The separate charge for services is excluded and so are the costs of those services. The service charge and service expenses will be charged to tax using the rules for trades.

Rental business isn’t usually a trade

It is unusual for a rental business to amount to a trade except in the case of a hotel, guest house or similar activity where meals, cleaning, changes of linen etc are provided. Where there is a hotel etc trade, the earnings from guests and the cost of providing the services (meals, cleaning etc) are all included in the computation of the trading profits of that hotel etc. The costs are not then allowable as a deduction against rental business income. There is more guidance on this subject at PIM4300.

(13) Rent collection

The cost of rent collection is generally deductible in computing rental business profits provided it relates wholly and exclusively to property let out on a commercial basis (see PIM2005).

(14) Salaries and wages of employees

Salaries and wages that a landlord pays to employees engaged full time or part time on managing the land or property within their rental business are allowable. This includes any normal pension contributions they may pay for their employees. But unusual or lump sum pension contributions may not be allowable.

A deduction can’t be claimed for salaries and wages that were not paid during the tax year unless they were paid within nine months after the end of it. This is a special rule that only applies to pay. The relief isn’t lost if the wages etc are paid late; in that case the deduction is given in the tax year when the payment is actually made, (FA89/S43 or ITTOIA05/S272).

Sometimes an employee is engaged partly to manage the rental business property and partly on private work or other work outside the rental business. Here a fair and reasonable split has to be made which takes into account all the facts; only the part of the wage or salary properly attributable to the rental business duties is allowable as a deduction in computing the rental business profit or loss.

A landlord can’t deduct anything for the time they spend themselves working in their own rental business. They can deduct any wages or salaries they pay to their spouse, civil partner or other relations for working in the rental business provided the amounts paid represent a proper commercial reward for the work done. The spouse, civil partner or relative will be taxable on their earnings if their income is large enough.

The landlord will need to operate the PAYE and NIC systems on payments to employees.

(15) Sea walls

A sea wall is a wall or an embankment needed to protect land or property from flooding by the sea or any tidal river.

Revenue expenditure incurred on repairing a sea wall is allowable as a deduction, in the same way as expenditure on the repair of the property itself, where the property that the sea wall protects is part of the rental business.

Capital expenditure on making or extending a sea wall isn’t allowable as a normal rental business expense but it is allowable as a deduction under special rules. These rules allow the expenditure to be written off over a fixed 21-year period, (ICTA88/S30 or ITTOIA05/S315).

Suppose, for example, a taxpayer spent £63,000 during 2003-04 on the construction of a sea wall. They would be entitled to a deduction of £3,000 against their rental business income for 2003-04 and for each of the following 20 years (£63,000 / 21 years). The deduction is treated like a business expense - it isn’t deducted separately as an allowance.

A taxpayer can’t continue to claim any remaining allowance if they sell the land protected by the sea wall so that it no longer forms part of their business. The remaining allowance will become due to the new owner where the property forms part of his or her rental business. The remaining allowance can’t be used if the property isn’t used for business purposes; for example, where it is used as part of a private residence.