What are allowable expenses?
As a landlord, you must pay tax on your rental income, but you can deduct several expenses, reducing the tax you owe. For a cost to be an allowable expense, it must have been incurred wholly and exclusively for the purposes of renting out the property.
Knowing what you can claim can be tricky. We have summarised the HMRC guidance in this article.
What expenses are allowable?
You can deduct the following expenses from your rental income to calculate your taxable profit.
You can only claim general running costs such as phone calls, stationery, or other office supplies if they are exclusively for your property rental business. Where only part of an expense relates to your rental property, you can deduct that amount. For instance, you can claim for just the calls relating to your rental on your phone bill. You cannot declare indirect costs such as clothing, even a new business suit to wear to meetings about your rental business.
Landlords can claim for letting agent costs such as advertising for new tenants, photography and creating floor plans or virtual tours.
You can claim the cost of travelling to and from your rental property. Mileage can be claimed at 45p per mile for the first 10,000 miles and 25p afterwards. You can also claim for public transport. Remember, this must relate directly to your rental business and not include personal journeys.
Paying a letting agent to let your property, and for property management, is an allowable expense, as are accountancy fees or solicitors fees for legal work relating to letting out your property.
All of your landlord insurance is an allowable expense. This includes buildings, contents and public liability plus any additional insurance you purchased for home emergency cover or to cover you for non-payment of rent.
Fees for services
If your rental agreement includes the provision of gardening or cleaning services, you can deduct these costs from your taxable income.
Council tax and utility bills
If you include water rates, council tax, gas and electricity bills in your tenants' rent, you can claim the costs of this as an allowable expense.
However, if your tenants pay their utility bills and council tax, you can only claim for charges incurred when the property is empty.
If your rental property is a leasehold, you can claim for any ground rents and service charges.
Repairs and maintenance
Landlords must keep their property in good order, so repairs and maintenance are allowable expenses. You can claim for plumbing work like burst pipes and leaks, boiler repairs, remedying electrical faults and damp treatment.
Repairing damaged walls, ceilings, and floors is allowable, and you can also deduct the costs of repainting between tenancies. You can also claim the costs of repairing the roof or replacing damaged windows.
HMRC only allow maintenance costs, including the accepted modern equivalent, on a like-for-like basis. For instance, double glazing is the industry norm and is no longer treated as an improvement cost.
Replacement of domestic items
You can claim 'replacement of domestic items relief' when replacing furnishings and appliances that have reached the end of their lifespan.
This tax relief covers replacing floor coverings, curtains and blinds, moveable furniture such as sofas, beds and wardrobes, household appliances, kitchenware, and cooking utensils. You can also claim for the cost of disposing of the old item and delivering the replacement.
The new original item must be entirely out of use to claim tax relief against the total cost. The replacement must be comparable, but if, for example, new appliances are more energy efficient as standard, that's acceptable.
If an insurance policy or a proportion of the tenant's deposit was used to cover the costs partially, it would reduce the replacement of domestic items relief you can claim.
What expenses aren't allowable
The following costs are not considered allowable expenses for income tax purposes.
You cannot claim for the costs of improving your property with a new addition or an upgrade. For example, exchanging a worn-out bathroom for today's equivalent could be allowable – installing a new ensuite would be an improvement.
The cost of purchasing the property counts as a capital expenditure; this includes the purchase price, stamp duty, surveyors fees, and legal fees. The initial purchase of furniture, furnishings and white goods are also considered as capital expenses.
Capital expenses are not allowable and cannot be claimed against your rental income. However, you should keep a record of these as you might be able to offset the cost against capital gains tax if you come to sell the property in the future.
Since April 2020, you can no longer deduct your mortgage expenses from your rental income. Instead, you receive a tax credit of 20% of your mortgage interest payments.
You cannot claim any expenses not incurred solely for your property business.
How to work out and report your taxable profits
Keep meticulous records to help you claim tax relief on your income tax return. You only need to file a single return at the end of the tax year, even if you rent out multiple properties. HMRC consider all your rental income as part of one residential lettings business.
Good record-keeping is crucial. Records of allowable expenses should include:
- the date on which the expense was incurred
- the supplier
- a description of the expense
- the amount and any VAT element
- a supporting receipt
Tax free property allowance
If you earn less than £1,000 gross rental income during the tax year, you do not need to tell HMRC and will not pay tax on it.
If your gross rental income is £1,000 or above, you can elect to deduct your property allowance of £1,000 instead of deducting your actual allowable costs.
If your property portfolio makes a loss, it is better to deduct your actual allowable costs as you cannot claim for a loss if you use your property allowance.
Reporting your tax
You must fill out a Self Assessment tax return if your rental income is:
- £2,500 or more after allowable expenses
- £10,000 or more before allowable expenses
Contact HMRC if your rental income is between £1,000 and £2,500. They will advise you on whether you need to complete a tax return.
Calculate your taxable profit by deducting the total allowable expenses from the total rental income. How much tax you pay depends on your total income for the year.
Find out more
If you are considering becoming a landlord, we can help you through the tricky issues you'll need to get to grips with when renting out property for the first time. Contact us to find out more about our services.