Buying another property – what costs can be deducted from the income?

by Readers Question

10:45 AM, 26th July 2016
About 2 years ago

Buying another property – what costs can be deducted from the income?

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Buying another property – what costs can be deducted from the income?

I have recently bought a second buy to let property and a little unsure of what costs that can actually be deducted from my income.tax deductable costs

I let out my first property since 2014 and the purchase of the second property completed in May 2016 and it was then been let out in June. I am currently completing tax returns for April 2016 and would like to have some advise of which of these purchasing costs (if any) can be deducted against my rental income?
– legal cost of purchasing the second property
– survey fee
– mortgage arrangement fee
– mortgage application fee
– other costs associated when purchasing this property e.g. searches, ID verification etc

My questions are:

– which of the above costs can be deducted against rental income?

– although the completion of the second property was done in May 2016 but some of the costs was spent between Jan 2016 to April 2016 (i.e. within the April 2016 tax year)- should the costs be claimed in 2016 or 2017 (as the property was let from June 2016 so it falls in the next tax year)? If the costs to be claimed in 2016 it will mean that it will be deducted against the rental income from my first property- will this be ok?

– I have also tried to purchase another property back in Dec 2015 but the buyer dropped out last minute and I have already spent some legal costs and survey fees- can I deduct this cost/loss from my rental income in 2016?

Thanks

Angie



Comments

Neil Patterson

10:49 AM, 26th July 2016
About 2 years ago

Hi Angie,

Please check out our full article and tax tab, but snippet below:

https://www.property118.com/landlords-tax-returns-10-common-mistakes/61630/

In this article I am going to share the common mistakes that landlords make when completing their tax returns.

In no particular order and certainly not a definitive list:- Landlords Tax Returns - 10 Common Mistakes

1) Treating the entire mortgage payment as an expense.

You should only claim mortgage interest as an expense. If you have a repayment mortgage this is not the full monthly payment. Check your annual mortgage statements from your mortgage lender and claim only the interest element of your repayments.

You can only claim interest as an expense if the borrowed money was used to finance your property portfolio or to withdraw capital you invested into it.

2) Claiming improvements as expenses. For example, if you extended a property the money you invested should be treated as capital and not as expense items.

3) Claiming legal fees associated with purchases as expenses. These should be treated as capital items. However, legal fees associated with refinancing may be treated as expenses.

4) Forgetting to declare profits made on sales of previously let property as capital gains.

5) Not claiming PPR relief and lettings relief against capital gains made on a property which was once your principle private residence.

6) Over/under claiming on use of home as office expenses

7) Forgetting to account for business/personal use of vehicles, mobile telephones and internet use

8) Thinking that a tax return isn’t necessary due to making losses

9) Owning property jointly but only submitting one tax return

10) Failing to account for rental income on overseas properties, whether they make profits or losses

michelle mor

9:28 AM, 27th July 2016
About 2 years ago

Good morning, does that mean can claim the interest on a loan of £45000 that I got as I could not get a mortgage , so I got 3loans of 15000 each and can I reclaim it at the end of the payment instead of each year.
Thanking for any advise. Michelle

Kate Mellor

13:17 PM, 28th July 2016
About 2 years ago

It would be great if someone on here who is an accountant could confirm or refute this, but my understanding is that all the major property-specific expenses/costs involved in the actual purchase of a new property (ie survey & legal fees) are considered Capital Expenses and as such form part of the initial cost of your new property from which you would deduct the sale price to determine your capital gain or loss at the point that you sell the property (so not claimable against your income).

It would seem however that you CAN offset costs associated with the mortgage arrangement/finance, such as fees charged by your mortgage advisor/introducer and arrangement fees charged by your lender as Revenue Costs. You may need to spread an arrangement fee over a longer time period, for example if you have a special offer which is fixed for two years, your accountant may insist that the arrangement fee charged by the lender be split and claimed over two years.

With regard to the costs associated with the purchase which fell through, I'm sure I've read somewhere on the HMRC website that these are not tax deductible. The reason being that the expenses which relate specifically to the property (survey costs, legal fees etc) are Capital Expenses and as there is no asset to which they relate they are effectively lost. If something would ordinarily be a Capital Expense, it doesn't become a Revenue Expense just because the purchase fell through.

Again costs associated with arranging finance, whether or not you actually ended up taking out the finance, or any other incidental costs eg. Mortgage Advisor fees, will still be Revenue Expenses and as such are claimable against your rental income even if the purchase fell through.

There is an awful lot of information on the GOV.UK website relating to tax treatment of investment property if you are able to successfully find it. I find the Property Income Manual & the Business Income Manual particularly useful resources. If you go to the gov.uk website and search 'HMRC Manuals' a list of them will come up. You can't beat having a good accountant however and they can save you a lot of money.

Rich Green

2:07 AM, 31st July 2017
About A year ago

The problem I see is a lot of the advice is inconsistent. eg this article says that BTL purchase legal costs are not allowed as an expense, but another article said they were.


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