Q. I have an empty buy-to-let flat that I’m selling. Can I offset my capital gains tax against utilities costs and my local rates bill?Antony, 70
There are several expenses that landlords incur when they own a property and different tax rules apply depending on what they relate to. The costs of utilities and rates are not capital in nature and so will not be deductible when calculating the capital gains tax (CGT) bill you get when you sell the property. But, depending on your circumstances, you may be able to deduct these costs when calculating your rental profits and income tax.
Property expenses can generally be split into revenue or capital expenditure. Revenue expenditure can usually be offset against rental income for tax purposes, while capital expenditure may be deducted before calculating the capital gain or loss when you dispose of a property.
Revenue expenditure will include ongoing costs that are incurred exclusively in the course of your rental business, such as water rates, council tax and utilities, as well as general maintenance and repairs, and finance costs, such as mortgage interest.
Subject to any specific restrictions, these costs are generally deducted from the rental income to determine the profits that are subject to income tax. For most buy-to-let landlords, relief for borrowing costs is limited to a 20 per cent basic-rate tax credit.
When you dispose of a property, which may be by a sale or a gift, costs that are capital in nature can be offset against the sales proceeds to calculate the capital gain or loss. These include the purchase cost of the property (special rules apply when you acquire the property from a gift or inheritance), and the costs of acquiring and selling the property, such as estate agent commission, legal costs and stamp duty. Generally, you can also deduct the costs of enhancements, including extensions or significant upgrades.
Where the cost incurred is a repair or like-for-like replacement, this is generally seen as revenue expenditure. A significant renovation of a dilapidated property is likely to include more costs of a capital nature.
The cost of local rates and utilities relates to the running of the rental business and would normally be a revenue expense. If you have other rental properties, you can offset these expenses against the income they produce because all your buy-to-lets in the UK are usually viewed as one rental business for tax purposes.
If this is the only property you have rented, then unfortunately you may be unable to claim any tax relief for these costs, because the rental business is likely to have ended when your last tenants vacated. You cannot offset losses from property income against other income or capital gains.
When calculating your CGT liability on the sale, you will be entitled to deduct any capital losses brought forward from previous years and, depending on whether you have made any other gains, you may also be entitled to offset the annual exemption of £3,000. The top rate of CGT on residential property gains is 24 per cent if you are a higher or additional rate taxpayer. Basic-rate taxpaers pay 18 per cent. Residential property gains should be declared to HM Revenue & Customs within 60 days of completion of the sale.
Kate Aitchison is a private client tax partner at RSM UK. She advises on capital gains tax, inheritance tax, succession planning, investment structuring and tax residency