A good example of this is when purchasing decorating materials for a property. In such circumstances you can either:

• apportion the cost against the properties, or
• have a separate listing of generic expenses to add on at the end when you combine all the incomes and expenditures.

Either way is fine, as it makes no difference to the tax position, though practically the latter option may be easier and simpler to implement.

Storage Costs
A cost incurred by an increasing number of investors is storage costs.

The cost of renting storage space is allowable against rental income. The reason is that it fulfils the principal criteria of “wholly and exclusively”, as the cost was incurred for the purpose of your property business. If you never had rented property then you would not be incurring such costs.

Other Common Landlord Expenditures
Below is a list of other common costs that a landlord will incur that can be offset against the rental income:

• safety certificates, e.g., gas and electrical safety;
• stationery, e.g., stamps, envelopes, books;
• computer equipment;
• bad debts;
• legal and professional costs, e.g., accountancy costs;
• service costs, e.g., window cleaner, gardener;
• furniture/appliance rentals;
• advertisement costs;
• letting agent costs;
• books, magazines, etc;
• security/smoke alarms;
• telephone calls, including mobile telephone bills (but make sure you have an itemised bill to prove the calls made);
• bank charges (e.g., interest charged on property bank account).

You can use property management software to help you track expenditures.

The rules for pre-trading expenditure are quite complex, but in theory you can claim expenses incurred in the seven years before commencement of the rental ‘business.

The expenses are treated as incurred on the first day the rental business starts.

Having said that, HMRC will want to examine these expenses closely with a view to establishing whether they were incurred ‘wholly and exclusively‘ for the purposes of the ‘trade.’

Again, in theory HMRC can disallow any expense which has a duality of purpose, but in practice they will usually allow a split to be made.

They will also examine the expenses to see whether they are capital or revenue in nature.

Below is a list of some common types of pre-trading expenditure you are likely to incur before you buy your property:

- travelling costs
- the cost of purchasing dedicated trade/magazines for helping you to find your property
- the cost of telephone calls when phoning estate agents/property vendors, etc.

The important point to note is that each occurrence of a pre-trading expenditure must be incurred wholly and exclusively for the property.

If you are uncertain, seek advice.

However, if someone owned a property on 5 April 1988 that has been continuously occupied rent-free by a dependant relative since that date, the property is exempt from CGT when the owner disposes of it.

Dependant relative is defined as the owner’s own, or the owner’s spouse’s, widowed mother or any other relative unable to look after themselves because of old age or infirmity.

There is another possibly tax effective way of providing a home for a relative: by acquiring a property, putting it into trust, and allowing the relative to live in it rent-free for life. However, this is a simplification of the subject, and professional advice must be sought.

Fixtures and fittings are items that are classed as being an integral part of the property. If a new tenant moves into a property, they will expect these items to be in the property.

Examples of fixtures and fittings include:

- windows, doors, light fittings;
- kitchen units;
- bathroom suites;
- gas central heating systems and radiators or hot water supply tanks;
- gas fires, etc.

The most important point to understand about fixtures and fittings is that any cost incurred in repairing them or replacing them with a like-for-like product can be offset against the property rental income. This is regardless of whether the property is un-furnished, partly furnished, or fully furnished.

Two important conditions must be satisfied before you can offset the cost of replacing fixtures and fittings. These are:

a) The cost must be a ‘replacement’ cost. In other words, it cannot be for the installation of fixtures and fittings that were not previously in the property.

b) The cost must be for a similar, like-for-like product.

If both these conditions are met, the cost can be deducted from the rental profits.

Sometimes you will incur a rental loss on your property investment. Rental losses can be incurred intentionally or unintentionally. The important point to note is that any losses can be carried forward into the next year and can be used to reduce your tax liability for that year.

Case Study: After three years of owning his two-bedroom buy-to-let property, John decides to replace the bathroom suite. The cost of replacing it with a like-for-like replacement is £2,500.

His rental income for the property is £4,800 annually, but after all his annual expenses are deducted, e.g., offsetting interest payments, the cost of the replacement bathroom suite, etc., he is left with a £1,000 rental loss.

This loss can be carried forward and offset against his rental income the following year.

There have been numerous tax cases on this issue, and the distinction can be very difficult in the “grey areas” between the two, but as far as the typical property letting business is concerned, the path is quite well-trodden, and there are some clear distinctions to be made.

Capital expenditure involves acquiring an “enduring asset” for your business – the most obvious example being buying a property you intend to keep and use as the HQ of your development business.

A Capital receipt involves receiving a payment for disposing of such an asset – again, the most obvious example would be selling a property you have been using as your HQ.

Revenue expenditure means expenses that do not produce an “enduring asset” – the basic running costs of your business. The obvious example would be travelling expenses.

Revenue receipts mean the income produced from the business – such as the sale of the developed properties.

You deduct revenue expenses from revenue receipts to arrive at your profit for income tax purposes.

You deduct capital expenditure from capital receipts to arrive at the capital gains you make from disposing of assets.

There can sometimes be problems in deciding exactly where the line should be drawn between capital and revenue, particularly where expenditure is concerned. If in doubt, seek advice from a qualified tax adviser.

In the case of losses at the beginning or end of your trading enterprise, the loss can be carried back to earlier years.

The detailed calculation of a loss for tax purposes, and how to set it off against other income, can be extremely complicated – take professional advice if you are in this situation.

Do not set up a company that manages your properties and just simply start paying money into it.

If you just go ahead and start making payments into your company, HMRC could challenge you (if you are ever investigated) for making artificial transactions to avoid paying tax.

Just drawing up a simple contract that outlines the services your company is providing to you will help to prevent such a challenge!

This is equally true of rental income, of course, but in the case of trading records, you are required to keep the records until the fifth anniversary of the 31 January after the end of the tax year – so for 2006/07, the records must be kept until at least 31 January 2013.
A trader’s accounts must be prepared on the accruals basis, but unlike a property investor, you may make up your accounts to any date you wish.

For each tax year, you will be taxed on the profits of the accounting year ending during that tax year – if your accounts are made up to the year ending 30 September, for example, for the tax year 2008/09 you will pay tax on your profits for the year ending 30 September 2008.

In the first couple of years of trading, the method is slightly different:

• First year – you will be taxed on the profits from the date you began trading to the following 5 April – so if you start trading on 1 October 2006, you will be taxed on the profits from 1 October 2006 to 5 April 2007.

If you make your accounts up to a different date, the profits will be apportioned to arrive at the correct figure for the period to 5 April.

• Second year – The profits of your first twelve months of trading

The fine detail of how profits in the early years are taxed, and the choice of the most tax-efficient accounting date, can be very complicated, and you would be wise to seek advice from your accountant or tax adviser.

This relief is not often available, because the definition of job-related accommodation is very strict.

The object of the relief is to enable someone who has to live in a particular place (such as the manager of a pub required to live on the premises) to buy a house elsewhere (perhaps for his retirement) and have it treated as if it is his main residence, even though he has not yet lived there.

In some circumstances, this relief is also available to the self-employed and to owners/directors of companies.

Provided that it was genuinely your intention to live in the house in the future, it is possible for the house to be sold and the gain to be exempt, even if you have never lived there, but HMRC are likely to look very closely at the facts in such a case.

A word of caution

If you think you may be in this situation, do not just assume your present accommodation is job-related and that you will qualify for this relief – check with a tax adviser as the rules are strict, complicated and illogical, like a lot of tax rules.