If you make money from renting out a property, you have to declare your profit to HMRC and pay tax on it each year. This can add up to a sizeable bill, especially for those landlords who fall into the higher and additional tax brackets.

Despite this, according to a survey by Home Made, roughly 42% of landlords don’t deduct all of their allowable expenses from their profit — and a whole 20% don’t deduct anything at all.

If you’re unsure of what you can (and can’t) claim as an expense on your tax return, you’re not alone. The rules set out by HMRC are very strict, and can sometimes be confusing. In this guide, we’ll take you through the landlords’ expenses that are allowable (and those that aren’t) so you can get it right next tax season — and potentially knock a chunk off your tax bill.

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What are allowable expenses?

Landlords can deduct some of the costs of renting a property from the profit section of their Self-Assessment tax return. For example, if you earned £12,000 in rental profit over the year, but spent a total of £4,000 on allowable expenses to enable you to rent the property, you would only pay tax on the remaining £9,000.

However, HMRC has very strict rules on what is and isn’t classed as an allowable expense and can be deducted from your taxable profit. The costs you declare must have come about exclusively for the purposes of renting the property.

It’s important that you only claim the things HMRC allows you to claim as tax deductions, or you could be given a penalty. Landlords (and everyone filling out a Self-Assessment tax return) must also keep all of their receipts and invoices for the five years following the January 31st tax return deadline each year, as HMRC could inspect them at any time during this period.

Full list of allowable expenses for landlords

HMRC has provided detailed guidance on the expenses landlords are allowed to claim, as long as they’re ‘incurred wholly and exclusively for the property rental business’, which means you can only claim for business-related expenses. Landlords can claim the following expenses:

General maintenance and repairs

Landlords can claim for the cost of maintenance and repairs to their property, but not the cost of improving the property — HMRC makes a clear distinction between the two. This means that if you replace a fitting or fixture in the property, it needs to be a like-for-like replacement in order to be an allowable expense. For example, if you replace a lino kitchen floor with a tiled one, you won’t be able to claim for this.

Utility bills

You can claim for the cost of various utilities such as council tax, electricity and gas. However, if your tenants are responsible for paying utility bills, you can only claim for the parts of the year when the property was empty.

Insurance

You can claim for the cost of landlords’ policies such as buildings, contents and public liability insurance.

Accountant’s fees

If you use the services of an accountant to help you let the property, you can claim their fees as an expense.

Letting agent and property management fees

If you use a letting agent to help you find a tenant or a property management service to help you manage the rental, you may deduct their fees from your taxable profit.

Legal fees

You can claim for the cost of legal fees, but only in certain situations. Specifically, you can claim them for leases of a year or less, or for renewing a lease for less than fifty years.

Rents, ground rents and service charges

If you’re subletting your property, you can claim the cost of the rent you pay your landlord. Likewise, if you’re a leaseholder, any ground rent or service charges you pay are also deductible.

Transport and travel expenses

You can claim for transport costs — such as public transport tickets, mileage, car tax and insurance — as long as they were incurred for the sole purpose of running your rental business. This means that you can’t claim for the entire cost of your car if you also use it for personal errands or doing work for another business.

Direct costs associated with the rental

This category includes things like telephone bills and stationery, as long as the costs were incurred for the purposes of the rental. If you also use your telephone for personal or other business calls, you can only claim the part of the bill that relates to your property letting business. You can also claim the cost of advertising for new tenants.

What can’t landlords claim for?

There are also certain costs that HMRC expressly says that landlords cannot claim as expenses:

Mortgage payments

Landlords can’t claim the cost of paying their mortgage as a business expense — and thanks to changes that have been gradually rolled out since 2015, private landlords can no longer claim the interest paid on mortgage payments either.

Clothing

Clothing is never an allowable expense for landlords — even if you bought it for business purposes. For example, if you buy a new suit for a business meeting, you can’t claim it as an expense.

Personal expenses

All expenses you claim as a landlord must be incurred wholly for the purposes of renting your property — so you can’t claim for personal costs such as transport or telephone bills that weren’t related to your business.

Capital expenses

Capital expenses are the expenses involved in buying or improving a property and are not allowable. For example, if you buy a house in a run-down condition and refurbish it in order to let it to tenants, you won’t be able to claim the costs of the building works as an expense.

Relief for the replacement of domestic items

Previously, landlords could claim a flat 10% of their rental income for replacing items that had been damaged due to normal wear and tear. However, this changed in 2016, due to concerns that unscrupulous landlords could claim this without replacing anything, and others might spend more and not be able to claim for it.

If you need to replace certain items in your property, you might be able to claim tax relief for the cost of the replacement.  This includes:

• Moveable furniture such as beds, sofas and tables.
• Furnishings like curtains, carpets and floor coverings.
• Household appliances like fridges, cookers and TVs.
• Kitchenware, such as plates, knives and forks.

You can claim this tax relief whether you let your property furnished, part-furnished or unfurnished — but not if it’s a furnished holiday rental. In this case, you may be able to claim capital allowances on these costs instead.

In order to qualify for tax relief, the item you buy has to be a like-for-like replacement for the old item. If the new item is more expensive, you’ll only get tax relief on the cost of the old one. For example, if you bought a new sofa for £500 but the old one only cost £300, you would only get tax relief on £300. The new item must also be exclusively for the use of your tenants, and the old one must no longer be available for their use.

It’s also worth noting that this tax relief only applies to the replacement of items. This means that if you fully fit out a property ready for a rental, you can’t claim tax relief on these costs.

Claiming part expenses

Sometimes, you might spend money that is not ‘wholly and exclusively’ for your rental business, but part of it is. In this case, you can claim the proportion of the cost that went towards your rental as an expense.

For example, imagine you needed to replace damaged wallpaper in your rental property, but when you got to the hardware shop, you found the wallpaper was cheaper when bought in bulk. If you decided to use the extra supplies for your own house, you could only claim the proportion of it used for the rental property on your tax return. Similarly, if you only rent out part of your property or rent it for part of the year, you can only claim utility bills for that part of the house or period of the year as business expenses.

Property allowance

Landlords are entitled to an annual tax free allowance of £1,000 on income (turnover, not profit) generated from their rental property. While this sounds attractive in theory, in practice there are a number of exclusions that limit its application in reality.

In its most straightforward application, the property allowance provides full relief for landlords whose total income is less than £1,000 during the tax year. Individuals who qualify for full relief do not need to register with the HMRC or file tax returns (though it’s still important to keep personal records for reference).

The landlord is subject to self-assessment where rental income exceeds £1,000. In this scenario, the legislation provides for so-called partial relief. Individuals can either:

• Deduct the real cost of their property business expenses in the normal way, or
• Choose to claim the £1,000 allowance as a deduction from the taxable income.

If you claim partial relief, you cannot deduct any other expenses from your taxable rental income.

You can decide on a year-by-year basis which approach is the best to take according to your annual outgoings. If you incur few expenses when running your property (e.g. you have a single property with no mortgage that required few repairs and you didn’t incur any marketing costs), it might make sense to claim partial relief. However, if your operating costs exceed £1,000 then it is better to deduct your actual expenses.

What if you let through an LLC?

Tax is worked out differently if you incorporate your business and let your property through a limited company. Similarly to private landlords, LLCs must also declare their profit, less any allowable expenses. However, one major advantage from a landlord’s perspective is that bank fees including interest on loans such as mortgages are a deductible expense for businesses.

LLCs pay Corporation Tax instead of Income Tax, which is taxed at a different rate. For more information on incorporating and whether it’s the right choice for your rental business, read our guide to the pros and cons of buying a property through a limited company.

If you operate a rental business, it’s important to know exactly what you can and can’t claim as a business expense on your tax return. If you’re claiming for expenses that are not allowable, you could be liable for a penalty if you’re investigated by HMRC.  On the other hand, if you’re not claiming for things you should be, you could be paying more tax than you need to — and ultimately hurting your bottom line.

Article by Annie Caley-Renn

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