Being a landlord comes with plenty of costs, from repairs and insurance to letting agent fees and safety checks. The good news is that many of these costs can reduce your taxable rental profit. The less good news? Not everything you spend on a rental property is an allowable expense. Understanding what expenses landlords can claim can help you avoid paying more tax than necessary, while also making sure you stay on the right side of HMRC.
What Expenses Can a Landlord Claim?
Generally, expenses incurred wholly and exclusively for the purpose of renting out your property may be deductible when calculating your taxable rental profit.
Common allowable expenses can include:
- letting agent and management fees;
- landlord insurance;
- maintenance and repairs;
- accountancy fees;
- utility bills and Council Tax where you pay them;
- ground rent and service charges;
- cleaning and gardening services; and
- advertising for new tenants.
There are specific rules around some expenses, so it’s important not to assume that everything connected with your property will automatically qualify.
Repairs vs Improvements
This is one area that regularly causes confusion. Generally, a repair restores something to its previous condition, whereas an improvement adds something new or significantly upgrades what was there before.
For example, replacing a broken boiler with a modern equivalent would normally be considered a repair. Building an extension, on the other hand, is a capital improvement and wouldn’t normally be deducted from your rental income.
Modern technology doesn’t automatically turn a repair into an improvement either. HMRC recognises that today’s equivalent product may naturally be better than the original. Replacing old single-glazed windows with modern double glazing, for example, can still potentially be treated as a repair. Capital improvements should still be recorded carefully, as some costs may be relevant when calculating Capital Gains Tax if you eventually sell the property.
What About Furniture and Appliances?
Landlords may also be able to claim Replacement of Domestic Items Relief when replacing certain items provided for tenants.
This can include things such as:
- beds and other moveable furniture;
- curtains and carpets;
- fridges and freezers; and
- crockery and cutlery.
Importantly, the relief generally applies to replacing an existing item, rather than buying it for the first time. If you replace an item with a significantly better version, the amount you can claim may also be restricted to the cost of an equivalent replacement.
Can Landlords Claim Mortgage Interest?
This is another important distinction. If you personally own a residential rental property, mortgage interest and certain other finance costs aren’t simply deducted in full from your rental income.
Instead, eligible residential finance costs generally receive tax relief at the basic rate of Income Tax. This can have a particularly significant impact on landlords who pay higher or additional-rate Income Tax.
The rules are different for properties held within a limited company, where qualifying interest on property loans can generally be treated as a business expense. That doesn’t automatically mean owning property through a company is more tax-efficient, there are many other tax and financial considerations involved.
Don’t Forget the £1,000 Property Allowance
Individuals can potentially receive up to £1,000 a year of property income tax-free through the property allowance. However, you generally can’t use the £1,000 property allowance and also deduct your actual allowable expenses from the same property income.
If your expenses are more than £1,000, claiming the actual expenses may therefore be more beneficial. Which option is appropriate will depend on your circumstances.
Keep Good Records
Whatever you’re claiming, keep the paperwork to support it. That means retaining records such as invoices, receipts, bank statements and letting agent statements.
Keeping on top of this throughout the year makes preparing your tax return considerably easier, and means you have the evidence available if HMRC ever asks about an expense. A little organisation throughout the year is much easier than the traditional January shoebox panic!
Not Sure What You Can Claim?
Claiming all the expenses you’re entitled to can make a real difference to your taxable rental profit, but it’s important to understand where HMRC draws the line.
At Greystone Advisory, we can help landlords understand which expenses are allowable, make sure they’re claiming the appropriate tax relief and keep their property finances in order. If you own rental property and aren’t sure what you can claim, get in touch with Greystone Advisory.
