Summary. Landlords of HMOs generally can’t claim capital allowances for communal areas, as HMRC considers these as part of the dwelling. Tax deductions are viable for repairs and domestic item replacements. Incorrect claims risk penalties. Expert HMO tax advice is recommended.
Our previous article on capital allowances for landlords raised a few questions regarding HMO tax. As well as, where you stand if you rent a property with shared amenities, such as buy-to-let houses of multiple occupation (HMOs) or student houses.
What is a HMO property?
A HMO is a property let room by room, with each tenant having access to communal areas – such as hallways, kitchen, bathrooms etc. For example, when renting rooms to students.
Can you claim CAs for common areas in a HMO property?
As a general rule, money spent by landlords on equipment for use by tenants of residential properties (dwellings) do not qualify for CAs. However, some housing experts will tell you that it’s possible to claim for equipment which services the communal areas of the property (e.g. corridors, stairs, halls and landings etc.), that do not in themselves provide any ‘facilities required for day-to-day private domestic existence’.
Section 35 of the Capital Allowances Act 2001 (CAA 2001) is clear. It expressly prevents landlords from claiming capital allowances for any equipment that is provided for use in a ‘dwelling-house’. HMRC’s reasoning is that the whole property, including the shared amenities, constitutes a dwelling. For example, the house that you live in with your family is considered a single dwelling. It is not considered on a room-to-room basis, so why would it be any different for HMOs?
When can you claim HMO tax?
HMO tax can be claimed if you own a property where each floor consists of self-contained living (a sleeping/sitting area, a cooking area, bathroom and toilet). This type of property is considered as multiple dwellings. In this case, HMO allowable expenses apply to the common areas, such as stairways, etc. These areas are not part of a dwelling, and so CAs can be claimed for floor coverings, lighting etc. contained in them. HMRC operates a ‘process now, check later’ policy. So statements and repayments are generated automatically before being checked by a real person. If an inappropriate claim for allowances is discovered at a later date, it will see the claim rejected. It could also be subject to interest and penalties. For example, up to 20 years after the initial claim has been made and seemingly accepted by HMRC.
Is there an alternative option?
The simple answer is, yes. Allowable expenses for landlords is a bit of a grey area when it comes to claiming tax deductions, but there’s no dispute that the cost of repairs to a let property is tax deductible. HMRC accepts that the cost of replacing fixtures in a dwelling is a repair, and not a capital cost. This means the cost of repairs such as replacement flooring or a boiler is tax deductible. There’s also a special allowance for the cost of replacing movable “domestic items”, e.g. carpets, tables, chairs, etc.
Conclusion
Our view is that most buy-to-let HMO’s and similar properties do not qualify for capital allowances. If a taxpayer is found to have submitted an incorrect tax return or false claim it is highly possible that they will have to make up the tax underpayment or repay any claims, plus interest and potentially penalties too.
If you’re looking for answers about HMO tax then give us a call today. Our chartered accountants in Brierley Hill can help you determine the most financially beneficial option for tax deductions. If you would like to speak to one of our experienced chartered accountants, us on 01384 261300.
If you have found this blog helpful, you may wish to read our previous blog on Director’s Loan Accounts.
