When it comes to residential property letting, landlords are often focused on minimizing their tax liability through legitimate expense claims. However, when it comes to depreciation, a common accounting expense, many landlords wonder if it can be deducted as an expense when filing their CT600, the corporation tax return for companies. The short answer is that depreciation itself is not allowable as a tax-deductible expense in residential letting for CT600 purposes. However, there are other mechanisms available for landlords to recover certain costs related to their property investments.
This article will delve deeper into why depreciation isn’t allowed on CT600 for residential lettings, explore alternative reliefs like capital allowances and wear and tear allowances, and provide some practical insights for landlords managing residential property portfolios.
Understanding Depreciation in Property Letting
Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life. For example, if you own a property that is expected to last for 50 years, its cost can be spread out over that period for accounting purposes. This depreciation is often listed as an expense in a company’s profit and loss statement, reducing the taxable profit.
However, for residential property letting businesses, the rules around what expenses can be claimed for tax purposes are quite specific. In the context of filing a CT600, depreciation of residential property is not considered a deductible expense. This is a crucial distinction for landlords to understand.
Why Depreciation Isn’t Allowed as an Expense in Residential Letting
HM Revenue and Customs (HMRC) has specific rules regarding what can be claimed as expenses for residential property letting. These rules are in place to prevent overestimation of expenses and loss of taxable revenue for the government.
Depreciation is excluded from allowable expenses under HMRC rules because it is viewed as an accounting adjustment rather than an actual cash outflow. For tax purposes, HMRC doesn’t recognize depreciation as an allowable expense because it doesn’t reflect the real-time wear and tear of the property or its tangible replacement costs. Instead, HMRC allows for relief under more specific allowances aimed at covering certain property-related costs.
Alternative Reliefs for Residential Lettings
Though depreciation itself is not allowed as an expense, landlords of residential lettings can still benefit from other types of tax relief. These reliefs are designed to cover some of the costs related to maintaining and improving the property.
- Capital Allowances
While capital allowances are generally available for business assets, they are not typically available for residential properties. However, there are exceptions. Capital allowances can be claimed on items used for commercial purposes, such as furnishings, fixtures, and equipment in a furnished holiday let or other qualifying properties, but they are not available for the property itself.
For residential properties, landlords cannot claim capital allowances for the cost of purchasing, constructing, or improving the property. However, capital allowances can be claimed on certain integral features such as lifts, air conditioning systems, and electrical systems in some commercial and non-residential elements of the property.
It is important for landlords to differentiate between residential and commercial use when seeking to claim capital allowances. Even in mixed-use properties, such as a building with residential flats and a ground-floor shop, the eligibility for capital allowances will vary depending on the part of the property being claimed.
- Replacement of Domestic Items Relief
The replacement of domestic items relief, introduced by HMRC, allows landlords to claim for the replacement of certain items within their rental property. This relief covers things such as sofas, beds, fridges, and other domestic items that may wear out or break over time. This relief was introduced as a replacement for the previous wear and tear allowance, which was more of a blanket relief.
Landlords can claim for the cost of replacing domestic items like:
- Furniture (beds, sofas, tables)
- Appliances (refrigerators, ovens)
- Furnishings (carpets, curtains)
- Kitchenware (crockery, cutlery)
The relief allows landlords to deduct the cost of these replacements from their rental income on their tax returns. However, the claim is restricted to like-for-like replacements and does not cover upgrades or improvements. For example, if you replace an old washing machine with a more expensive, more advanced model, you would only be able to claim the cost of a similar machine.
- Repairs and Maintenance
Repairs and maintenance are one of the key allowable expenses for residential property landlords. Unlike depreciation, the costs of maintaining and repairing a property are allowable as expenses, provided they are to maintain the property in its original condition rather than improve it.
For instance, expenses incurred for repairing a roof, repainting a property, or fixing a broken window are all legitimate tax-deductible expenses. These repairs ensure the property remains habitable for tenants and do not represent an improvement or enhancement to the property.
Capital Gains Tax and Residential Letting
Another aspect landlords should consider, beyond expenses in CT600 filings, is Capital Gains Tax (CGT). When a landlord sells a residential property, they may be liable to pay CGT on the profit. Depreciation does not come into play when calculating CGT, but any capital improvements made to the property can reduce the tax liability.
Landlords should ensure they keep accurate records of any significant improvements made to the property, as these can be deducted from the sale price when calculating the capital gain, ultimately reducing the tax payable.
Filing a CT600 for Residential Lettings: Best Practices
When filing a CT600, it’s essential to understand what expenses are allowed and what aren’t, as well as maintaining clear, accurate records of income and expenditure.
- Track Eligible Expenses: Ensure all allowable expenses such as repairs, maintenance, and replacement of domestic items are carefully tracked and recorded. These can help reduce your taxable income and, subsequently, your corporation tax bill.
- Avoid Depreciation Claims: As depreciation is not allowable, landlords should ensure they do not include it in their CT600 return as an expense.
- Seek Professional Advice: Tax rules surrounding property can be complex, and professional guidance can help landlords ensure compliance while optimizing their tax situation. An accountant familiar with property tax rules can assist in properly structuring claims for allowable expenses.
- Accurate Record Keeping: Keeping detailed records of all expenses, rental income, and property-related investments is crucial when completing your CT600. This not only makes filing easier but also ensures compliance with HMRC’s regulations.
Conclusion
In summary, depreciation is not allowed as an expense in residential letting for the purposes of a CT600 return. Instead, landlords should focus on claiming allowable expenses such as repairs, maintenance, and the replacement of domestic items. Additionally, while capital allowances generally do not apply to residential properties, there are certain exceptions for commercial elements. Understanding these nuances can help landlords optimize their tax position and ensure they remain compliant with HMRC regulations. Seeking professional advice is often beneficial, especially when dealing with complex property portfolios and the intricacies of tax law.
