You can reduce your tax bill by claiming for some of the expenses of renting out property.
What are allowable expenses?
As a landlord, you must pay tax on your rental income, but you can deduct several expenses, which will reduce the amount of 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 types of expenses from your rental income to calculate your taxable profit.
Maintenance and repair
HMRC make a clear distinction between maintenance and repair costs and capital expenses. You can only deduct the costs you incurred restoring your property to its original condition. You can claim the costs of replacing furniture, furnishings and appliances if it was a like-for-like replacement (i.e. not an improvement). This extends to replacing kitchens and bathrooms too.
If the new item is an improvement on the old one, you can only claim the cost of buying an item the same as the original. For instance, if you replace the kitchen and swap laminate worktops for granite, you can only claim for the cost of a laminate worktop.
However, suppose the replacement item is a modern equivalent, for example, a double glazed window for a single glazed one. In that case, this doesn't count as an improvement, and the entire cost is allowable.
If you have an insurance policy that covers some of the repair costs, you can only claim for the additional expenses you incurred. Similarly, if the tenant's security deposit is used to cover damages, you can only claim expenses incurred in excess of the deposit you retained.
Council tax and utility bills
If you include council tax and utility bills in your tenants' rent, you can claim the costs of this as an allowable expense.
However, if your tenants pay these bills, you can only claim for charges you incurred when the property was empty.
All of your landlord insurance is an allowable expense. This includes building, contents and 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 gardening or cleaning services, you can deduct these costs from your rental income.
Paying an agent to let or manage your property is an allowable expense, as are accountancy fees or solicitors fees for legal work relating to letting out your property.
If your rental property is a leasehold, you can claim for any service charge or ground rent.
Direct running costs
You can claim general running costs such as phone calls, advertising for new tenants or photography, but only 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 if you needed a new business suit to wear to a meeting about your rental business.
You can claim for travel costs to and from your rental property. Mileage can be claimed at 45p per mile for the first 10,000 miles and 25p thereafter. You can also claim for public transport. Remember this must relate directly to your rental business and not be personal in nature.
What expenses aren't allowable
The following costs are not considered allowable expenses.
Capital expenses are costs of improving your property, such as when you add something to the property that wasn't there before or upgrade something existing. The cost of purchasing the property counts as a capital expenditure; this includes the purchase price as well as stamp duty, surveyors fees and legal fees. The initial purchase of furniture, furnishings and white goods are also considered as capital expenses.
Examples of capital expenses include adding an extension, creating an ensuite where one wasn't there before or replacing a kitchen or bathroom in poor condition with a more luxurious version.
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 are no longer allowed to deduct your mortgage expenses from your rental income. Instead, you receive a tax credit of 20% of your mortgage interest payments.
You cannot claim for any expenses that were not incurred solely for your property business.
How to work out and report your taxable profits
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.
Calculate your taxable profit by deducting the total allowable expenses from the total rental income.
If you earn less than £1,000 from letting out your property, you don't need to tell HMRC. 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.
How much tax you pay depends on your total income for the year and any allowances you are entitled to.
Find out more
If you are thinking of 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.