Allowable Expenses for Landlords

Being based in Oxford means many of our clients are landlords who receive rental income. HMRC requires them to pay income tax on these earnings. Our tax and accounting expertise allows us to not only help landlords complete their self-assessment tax return but identify as many allowable expenses for landlords as possible to reduce their tax bill. We share our knowledge with you to explain how to claim allowable expenses that will offset against your rental income to minimise your tax liability, as well as explain what costs are not tax-deductible and why.

Why are not all expenses for landlords allowed?

Generally, expenses that have been incurred wholly and exclusively for the purpose of running a business are an allowable tax-deductible expense against revenue. However, HMRC makes a clear distinction between two types of expenses which are classed as either capital expenditure or revenue expenditure. Depending on which type of expense you have incurred will determine whether it is tax-deductible against rental income or not. It is important to remember that, whilst not all expenses will be allowed to be offset against your rental profits, it may not necessarily mean they cannot be offset against other types of taxes which we’ll explain in more detail below.

What expenses for landlords are allowed to be offset against your rental income?

Revenue expenses are allowed to be offset against your rental income. Revenue expenses are considered to be those which are incurred as a result of the day-to-day management of your rental property. Common examples of allowable revenue expenses for landlords include:

• The cost of utilities and council tax if you pay for this as the landlord
• Estate agent fees
• Service fees if you pay for a gardener or cleaner to attend to the rental property
• Rent if you are subletting, ground rents, or service charges for the building
• Cost of maintenance repairs such as calling out a plumber to fix a leak at the property
• Any equipment that is used for all your rental properties (it cannot be only utilised for a single property) such as a lawn mower or jet washer.

Expenses that landlords commonly forget to claim

Not only can you claim the above expenses as tax-deductible against your rental property, but many landlords also forget to claim for some other not-as-obvious expenses that will still help reduce their tax bill:

• Mileage cost – you can claim 45p per mile (up to the first 10,000 business miles) travelling to your properties for inspections, viewings, repair works and collecting rent
• Landlord’s insurance – this will include any level of cover you choose from simply building’s insurance up to content insurance, loss of rent, and tenant default.
• Accountancy fees – if you use an accountant to help file your self-assessment tax return to declare your rental income, this cost is also tax-deductible

What expenses for landlords are not allowed to be offset against rental income?

Capital expenditure is not an allowable expense that can be offset against your rental income. Capital expenditure is defined as expenses incurred when you purchase or maintain fixed assets such as land, buildings, machinery, and equipment. In the case of rental property, the main capital expenditure will be purchasing the property itself. This means costs arising from the purchase of the rental property including conveyancing fees, stamp duty, building survey charges, and other related expenses are not allowed to be claimed against your rental earnings.

Moreover, if you make improvements to your property, these will also be classified as capital expenditure. Improvements can be substantial, such as building an extension, converting a front garden into a driveway, or creating an ensuite bathroom. Alternatively, even minor improvements will count as capital expenditure – from switching over from carpet to wood flooring, to adding in extra cupboards in the kitchen, and installing spot lighting. You won’t be able to offset these costs against your rental income.

If you choose to furnish your property to rent, you should be aware that the cost of the furniture is not an allowable expense for landlords. This is unlike if you were to buy furniture for a furnished-holiday-let where the rules are different and capital expenses can be claimed.

What tax relief can you claim to offset against your rental income?

Prior to 2017, landlords were able to claim their mortgage interest payment as revenue expenses and therefore offset the cost of it against their rental property. Many buy-to-let mortgages are interest-only mortgages and therefore effectively meant the entire payment was tax-deductible. However, since 2017, new laws came into force which meant that the amount of tax relief landlords could receive on mortgage payments reduced year on year until 2020 when the fixed amount you can claim as tax relief is 20% of your mortgage interest payments.

Historically, landlords were also able to claim ‘Wear and Tear Allowance’. This allowance was only available to landlords of fully furnished properties (excluding furnished-holiday-lets) and enabled them to claim 10% of their net rental income each year for replacing items that were worn out. However, this relief was available irrespective of whether landlords actually spent any money on replacing items and many landlords of non-furnished properties argued it was unfair as they would receive no relief for replacing things like worn out carpets or blinds.

In 2016, the wear and tear allowance was replaced with Replacement Relief. This instead allows the entire cost of the replacement item to be tax-deductible so long as the item was replaced with a like-for-like and not an improvement. The replacement allowance also covers the cost of disposing of old items, so long as any money received from disposing of the item is deducted. For example, if you sold an old sofa that originally cost £800 for £80 and replaced it with a new sofa that was also £800, you would be able to claim £720 tax relief. It is important to note that it is only the cost of the replacement item that is an allowable expense. The initial cost of purchasing furniture in order to rent your property cannot be claimed in any way and is therefore a sunk cost.

Although not as generous, the Property Income Allowance is also available and useful to landlords with small rental income. You need to be receiving over £1,000 in rental income in order to be able to use this allowance as, if you earn under this amount, there is no need for you to declare the income to HMRC. You also need to elect to use this allowance, as otherwise it is assumed that you would claim the actual amount of your expenses. Nevertheless, the Property Income Allowance can work to some landlord’s advantages. For example, you have a garage that you rent out from time to time throughout the year and earn £1200 but your annual expenses are £500 (for example for the cost of security cameras). You are still able to claim Property Income Allowance instead of claiming for your actual expenses and would therefore only need to pay income tax on £200 instead of £700. 

What tax relief can you claim to reduce your capital gains tax when selling rental property?

If the time comes when you decide to sell your rental property, then you may face a capital gains tax (CGT) charge. This will occur if you sell the property and make a gain from when you bought the property. CGT on residential property, which is not your main residence, is charged at a rate of 18% for basic rate income taxpayers and 28% for higher and additional rate income taxpayers. The CGT rates only apply to the gain made, not the entire value of the sale.

However, the Annual Exemption Allowance (AEA) is available each year to everyone (not just landlords). It offers a maximum of up to £6,000 to be accrued in capital gains tax-free each year when disposing of assets. You will be able to claim AEA when selling your rental property to reduce your CGT so long as you have not fully utilised it already in that tax year. Note that the AEA is due to be reduced to £3,000 from the tax year 2024/25.

Private Residence Relief (PRR) may also be available to some landlords selling their rental property. You will only be eligible to claim PRR if you have previously lived in the rental property as your main residence. The amount you can receive in tax relief is dependent upon the amount of time you have lived in the property, plus an additional 9 months as further tax relief. It is calculated by the period of rental occupation divided by the period total period of your property ownership multiplied by your capital gain.

Lettings Relief is similar to PRR but with one small distinction. If you were previously living in your rental property as your main residence but were also letting a part of your property to a lodger then this portion of your property is not eligible for PRR. Instead, you can claim Lettings Relief which allows for the lower of:

• The amount of PRR available irrespective of the letting;
• £40,000; or
• The value of gain earned during the letting period

Are there any other deductions to reduce your capital gains tax when selling rental property?

Whilst you’re not able to claim capital expenses against your rental profits to reduce your income tax bill, you are still able to make a claim for those expenses when it comes to selling your property and reducing your CGT. When calculating the gain made, you’re allowed to deduct these expenses to reduce the gain and therefore the CGT liability. Bear in mind that, in order for the capital expenditure to be eligible, it should have provided the house with some level of genuine enhancement or improvement. For example, erecting fencing or installing patio in the garden would be accepted, however; simply planting some trees or creating flowerbeds is unlikely to be considered as a capital expense that you could claim for.

Are there any other deductions to reduce your capital gains tax when selling rental property?

To pay income tax on your rental income, you will need to declare your earnings and provide calculations of your profits. Claiming for the above expenses and tax relief will help reduce your tax bill. If you need help with completing your self-assessment tax return, get in touch today through our contact form.