The next step

http www businesslink gov uk bdotg action layer topicid 1073868259

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http www hmrc gov uk briefs income tax brief4510 htm

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Property rental tax break withdrawn

Property expenses

Where you rent out a property the tax rules allow you to deduct the related costs from the income you receive before working out how much you owe the Taxman. That seems logical and fair, but as with most things relating to tax, it’s not quite that simple, and when it comes to certain expenses it gets particularly tricky and can leave you out of pocket.

Capital exclusion

Capital expenses, e.g. for equipment such as cookers, burglar alarms etc. and fixtures like wall lights, etc., can’t be deducted in one go, but have to be spread over a number of years under the Taxman’s capital allowances (CA) system (see The next step). But the rules also say that where you rent out a property, you can’t even claim CAs. But then came a subtle change in the rules.

2008 changes

The CA system was overhauled in 2008, and in doing so the Taxman created a loophole where the property rented out was of a communal type where occupants had their own living space but shared common cooking, laundry etc. areas. A good example is student accommodation. The 2008 rules meant that you could claim CAs for equipment included in the common areas and it didn’t take tax experts long to cotton on to this idea with a rush of claims following soon afterwards.

U-turn

The Taxman has recently issued a statement saying that the CA tax break created by the 2008 change of rules was unintended, and that from October 22 2010 no CAs can be claimed for expenditure on capital items from any sort of dwelling houses, communal or otherwise (see The next step). So CA claims for washing machines etc. are out. However, there’s still a chance to backdate a claim.

Tip. The new CA rules only apply to expenditure you incur after October 22 2010. This means that where you own a rental property which consists of bedrooms (with en-suite bathrooms) and communal areas such as a lounge, kitchen etc., you can make a claim for the cost of the equipment included in the general areas that was purchased between December 2008 and October 22 2010.

Example. In August 2008John bought a three bedroom house for his student son to live in and rented out the other two rooms to students. In January 2009 John replaced the sofa, chairs, television, and washing machine; these cost a total of £3,000. John can now make a claim for CAs. He has until January 31 2011 to amend his tax return for 2008/9 and claim a deduction for the £3,000.

Tip. CAs can still be claimed for the cost of equipment and fixtures included in areas of a communal property that aren’t used as day-to-day living space, e.g. an entrance lobby. This means you could claim for, e.g. light fittings, doorbells, post boxes or even a lift.

For information on the CA system (TX 11.05.06A) and for a weblink to the Taxman’s statement (TX 11.05.06B), visit http://tax.indicator.co.uk.