Q. I am in the process of selling my vacant buy-to-let flat. Is it possible to offset utilities and local rates against my capital gains tax? Antony, 70

When owning property, landlords incur different types of expenses, each subject to specific tax regulations depending on their nature. Unfortunately, utility costs and local rates do not qualify as capital expenses. Thus, they cannot be deducted when calculating your capital gains tax (CGT) at the time of sale. However, based on your unique situation, these costs might be deductible when calculating rental profits and income tax.

Types of property-related expenses are divided into revenue or capital expenditure. Generally, revenue expenses can be subtracted from rental income to determine taxable income, while capital expenses are considered when calculating capital gains or losses during the property’s disposal.

Revenue expenditure includes recurrent costs exclusively for the rental business, such as water rates, council tax, utilities, general maintenance, repairs, and finance costs like mortgage interest.

With few exceptions, these costs are normally deducted from rental income to establish taxable profits, keeping in mind that most buy-to-let landlords can only get a 20% basic rate tax credit for borrowing costs.

Upon disposal of property—via sale or gift—capital expenses can be subtracted from sales proceeds to compute capital gains or losses. This includes the purchase price (note special rules for gift or inheritance acquisitions), estate agent fees, legal costs, and stamp duty, among other acquisition and selling costs. Additionally, enhancement costs like extensions or significant upgrades can often be deducted.

If the expense is for a repair or like-for-like replacement, it is viewed as revenue expenditure. However, costs from a significant renovation of a deteriorated property mostly fall under capital expenses.

Local rates and utilities are typically revenue expenses related to the rental business. If you own other rental properties, you can offset these costs against their generated income as all UK buy-to-lets are considered a single rental business for tax purposes.

If this property is your only rental one, you may not claim tax relief on these expenses, especially if the rental business ceased when the last tenant left. Losses from property income cannot offset other income or capital gains.

When figuring out your CGT liability upon sale, you can deduct any capital losses carried over from previous years. Depending on other gains, you might also apply the annual exemption of £3,000. The top CGT rate on residential property gains is 24% for higher or additional rate taxpayers, while basic-rate taxpayers owe 18%. Announce residential property gains to HM Revenue & Customs within 60 days post-sale completion.

Kate Aitchison is a private client tax partner at RSM UK, specializing in capital gains tax, inheritance tax, succession planning, investment structuring, and tax residency.