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  • Tax

    CGT

    Hi,

    I  am in the process of completing the CGT section of my tax return for the sale of a buy to let  . In 2003 I bought a new build to rent out and spent £2432 on laminate flooring and £140 on carpet. I  did not offset this as income as believed this was a capital expense. Can I include this in the section costs of acquisition along with the SDLT and solicitor fees?

    Thanks Sue.

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    Yes, if this represents an improvement of the flooring.

    No, if this was a like for like replacement or if your old floor was damaged and in need or repairs.

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    Thanks for your reply. It was a new build and had no flooring in it what so ever. Can I offset the flooring I put down to rent it out against the CCT? Sue

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    In this case I would say YES

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    There has been a lot of changes since the budget announcement of what costs may be offset against rental income:

    The budget announcement changed an awful lot

    In previous years you could offset all of the mortgage interest you paid against your property income. If your property was furnished then you were also allowed a 10% wear and tear allowance. Both of these things helped to reduce your tax bill.

    Now you will not be able to offset all of your mortgage interest costs if you are a higher rate taxpayer, or even if your rental income before deducting mortgage interest costs pushes you from being a basic rate taxpayer into being a higher rate taxpayer. By 2020 a higher rate taxpayer will only get 20% tax relief against their mortgage interest costs, compared to 40% pre-April 2017. This effectively means that you will only be able to offset half the amount of the mortgage interest incurred against your property business.

    As you can see it is becoming even more difficult to invest in property while also being tax-efficient.

    It is therefore extremely important that you know exactly what costs are allowable…

    Allowable costs you can offset against your rental income

    The following types of costs may be offset against your property income to help you reduce your tax. This list is not complete but it gives you an idea of what costs may be allowable.

    Buying a property

    • Repairs: exterior and interior painting, damp treatment, stone cleaning, roof repairs, furniture repairs
    • Mortgage arrangement costs
    • Legal fees associated with the loan, so legal fees related to mortgage financing of the property

    Other costs that you incur when buying a property such as conveyancing fees for the purchase, finder’s fees, the actual purchase of the property, stamp duty and surveys are capital costs. You can’t offset capital costs against your annual rental accounts, but you can offset them against any capital gain when you eventually come to sell the property.

    Refurbishment of the property

    One of the strategies that I’ve talked about in a previous article is still very much relevant today. By using this strategy you not only minimise your property profits but you could build up losses for the future. This means that you will not pay tax on your property profits in the future as long as those losses exist.

    The types of costs that may be offset against your income here are:

    • Repairs: When carrying out repairs to broken units, roof tiles, furniture, plasterwork
    • Renewals: Such as repainting your property, cleaning costs
    • Replacement: For example, kitchen units, bathroom units, heating systems (boilers and radiators), lighting systems (including fuse boxes), carpets, curtains, fridges, freezers, TVs, beds, furniture (if all were in place at the time of purchase)

    HMRC had previously stopped people from claiming soft furnishings and freestanding units because it allowed the 10% wear and tear allowance, but since it has removed this allowance, if, for example, carpets and curtains that were already in the property need replacing then the replacement costs would be allowed.

    If you wanted to play it extra safe then I would suggest that you ask the sellers of any property you are buying to itemise the following on the sales documents:

    • Value of the land and building
    • Value of the kitchen
    • Value of bathrooms
    • Value of white goods (if supplied as a rental)

    This can then be used as evidence that there were assets in the property and will support the fact that you are replacing/repairing those assets, which means they can justifiably be offset against your tax. I would stress that you should not put in a kitchen costing £3,000 if the value in the sale documents only shows £1,000 as this will certainly be seen as an improvement and will be considered a capital expense.

    This works very well with properties that are in a lettable state but are very tired. As such you can justify to HMRC that the refurbishment costs will help you to increase the rental income of the property.

    HMRC guidance can be confusing on this issue, but on the issue of repairs it states:

    “If your roof is damaged and you replace the damaged area, your expenditure is allowable.

    “Even if the repairs are substantial, that does not of itself make them capital for tax purposes, provided the character of the asset remains unchanged. For example, if a fitted kitchen is refurbished, the type of work carried out might include the stripping out and replacement of base units, wall units, sink etc., re-tiling, work top replacement, repairs to floor coverings and associated re-plastering and re-wiring. Provided the kitchen is replaced with a similar standard kitchen then this is a repair and the expenditure is allowable. If at the same time additional cabinets are fitted, increasing the storage space, or extra equipment is installed, then this element is a capital addition and not allowable (applying whatever apportionment basis is reasonable on the facts).”

    Running your property business

    Allowable costs as part of you running your property business include:

    • Rents and leases
    • Business rates
    • Council tax
    • Water rates
    • Ground rents
    • Insurance
    • Maintenance: cleaning, gardening
    • Loan interest and finance charges (100% if you are a basic rate taxpayer but less as mentioned above for higher rate taxpayers)
    • Legal and professional costs (removal of tenants, accountancy fees, coaching fees, etc)
    • Utilities (if the tenants are not paying for them)
    • Stationery
    • Phone
    • Travel: to the house and associated companies managing the property
    • Hotels (if you are staying away for the purposes of your business)
    • Subsistence (while away on business)
    • Membership and subscriptions (property-related or management-related)
    • Education for employees (provided that the education is enhancing your knowledge)
    • Mileage

    With regard to mileage, I suggest claiming this rather than putting your car through your business as this would see you incur a benefit in kind or taxable benefit, or HMRC could claim that the car is used for personal usage and significantly limit the costs that you can offset against your property business

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    Simon Misiewicz | Business Development Manager

    Optimise Accountants

    Telephone: 0115 939 4606

    website: http://www.optimiseaccountants.co.uk