Recording property business expenses are important for two reasons:
- You need to know whether the business is making a profit or not; and
- To reduce your tax liabilities by offsetting them against profit
As a rule of thumb, all expenditure made on behalf of the business should be recorded. Areas to include are:
- Property purchases – keep the completion statement from the solicitor as this will record items that won’t be on your bank statement, such as fees and SDLT
- Mileage – keep a mileage record for business journeys such as visits to the property, picking up materials or seeing your mortgage broker
- Finance – make sure you have the mortgage statements so that the interest can be claimed, plus invoices for any broker fees or similar costs
- Repairs and maintenance – don’t forget those incidentals such as cleaning materials
- Marketing activities – this is particularly important if you’re flipping properties
- Ground rents, utilities and insurances – these could be whilst you’re developing a property for resale of when you’re between tenants
Not all expenditure will qualify
There are times when legitimate property business expenses are not allowable for tax purposes. This is particularly true in the Buy to Let arena, which can lead to a situation where there’s no cash profit – the expenditure exceeds the income – but there’s a taxable profit which can lead to unexpected bills from HMRC. Here’s some examples of what won’t qualify:
- Mortgage repayments – the interest charges are allowable but the capital element isn’t.
- Pre-letting expenses. These are the costs incurred before the property is first let, such as refurbishment, drawing up tenancy agreements and advertising. Refurb costs in particular can create cash-flow issues, with the tax relief only coming when the property is sold.
- Repairs and maintenance whilst the property is let, and in between lettings, do qualify for relief. Improvements to the property will only qualify when the property is sold.
- If you pay yourself from your profits, this won’t be allowable mas a business expense, unless you have a limited company and you pay yourself a salary. Dividends don’t get tax relief.
Keep good records
Good record keeping is essential, not only to help you manage your business or investments, but also for tax purposes. Generally records of your property business expenses need to be kept for 6 years after the end of the tax year. But if you have an investment property you will most likely need to keep them for as long as the property is in your ownership. This is because some expenditure – often called ‘capital expenditure’ will only get tax relief when the investment is sold.
So you could spend £40,000 on a refurbishment when you first buy a property, but what if you only sell it 20 years later? Will you remember what you spent? And what if HMRC want to look at the books? You might have a rough idea, you might know to the penny, but you might not be able to back it up with receipts and invoices.