Are HMO landlords really missing out on tax relief?

Are HMO landlords really missing out on tax relief?

16:40 PM, 27th February 2012, About 12 years ago 2

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Dozens of firms offer to help shared house landlords claim thousands of pounds in lost tax reliefs – but does the lost relief really exist?

The confusion surrounds houses in multiple occupation – HMOs – which are homes where several tenants have their own rooms, but share cooking and bathroom facilities.

Tax rules ban claiming capital items, like boilers and fire safety equipment in residential property unless they are in communal areas.

That means buy to lets are outside of the rules because the entire property is residential, but HMOs can fall within the rules because they have split communal and residential accommodation.

For these shared properties, landlords can claim relief on capital costs called capital allowances.

Capital allowances are the HM Revenue and Customs version of depreciation, or wear and tear on equipment.

The concept is simple – a business can claim depreciation at any rate but the figure is added back to profits before tax and replaced with capital allowances, which are claimed at a set rate across all businesses.

The tax trick is capital allowances are calculated at the replacement cost, including the cost of fitting and in some cases, carriage. This gives a much higher figure than the actual cost of the item.

For example, a boiler may have a cost price of £550 exc. VAT, but the capital allowance cost might be £950 including fitting.

Surveyors specialising in valuing capital costs reckon an HMO landlord can reclaim up to 10% of the purchase price of the property in capital allowances. These allowances are tax reducers – every pound of capital allowances claimed reduces taxable profits by £1.

So, if a HMO cost £180,000, the capital allowances could add up to £18,000.

Don’t forget the catches

  • Capital allowances are not repaid as a cash lump sum, but as a tax reduction each year, so don’t go out spending that windfall just yet.
  • The surveyor will charge a percentage of the valuation as a fee. This can easily add up to at least 1% of the capital allowances – £1,800 + VAT in the example
  • A professional valuation is needed because although tax adviser can calculate the relief on an assessed figure, a specialist is needed to visit the property.

On second look, in most cases HMO landlords have a claim, but the financial benefit is not necessarily as large as the valuers might suggest.

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Alex Williams

23:26 PM, 11th January 2013, About 11 years ago

Has anyone had this done, how did it work out for you ?

Phil Ashford

13:31 PM, 25th April 2013, About 11 years ago

I would be very careful with these claims...

It hinges on defining a bedroom as a dwellinghouse. I'm not convinced.

Secondly, if you do submit on the basis of your bedrooms in your HMO being a dwellinghouse, then you should probably phone the Council and tell the Council Tax department of your understanding. They will want to separately rate each dwellinghouse as a separate entity. Where you might have been a Band C previously for the entire house, you may find the Council agreeing with your definition of a dwellinghouse and wanting to rate each of your bedrooms as a Band A.

You do not need to be a mathematician to figure out how much more expensive your CT bill would be if you have 5 Band As versus 1 Band C.

Also of note: How can a bedroom be a dwellinghouse if you sign a Joint and Several AST for the whole house? Think of student HMOs let to whole groups....

Does the bedroom have running water? Facilities to cook? If not, how likely is it under case law that the bedroom would be a dwellinghouse.

Lastly, self assessment, is just that, self assessment. It will be your Capital Allowance claim. If you get a rebate, I would park the money away in case HMRC later decided to try and tackle the flood of claims that have appeared on the back of some aggressive 'no risk experts' that have appeared in recent years.

Good luck.

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