Landlords must include their rental profits (over certain thresholds) as part of their wider income and pay Income Tax on the earnings they make on their property lets. They are also eligible to offset certain property-related expenses against these profits and not pay tax on them, as they are counted as business expenditures.
It is important that landlords only claim expenses on legitimate items, or they may face a fine or even prosecution, depending on the extent of their claims. Although there is no definitive list of all the things landlords can and cannot claim back, there are general guidelines that state that the expenses must be wholly and exclusively for the purposes of renting out the property.
So what expenses can landlords claim? What expenses are they not able to claim? How do they make these claims? And are the rules the same for holiday lets and properties overseas?
Join us to find answers to these questions and more as we explore the allowable expenses landlords can claim.
As a landlord, you are entitled to claim various expenses that will be deducted from your Income Tax bill. While the list is not exhaustive, these expenses can be broadly categorised into five groups:
- Business expenses
- Professional fees
- Service fees
- Property charges
Within each of these, there are discrepancies that depend on the situation. So let's jump in and take a more detailed look at the types of expenses you can claim tax relief for.
You can deduct any expenses from your rental income on your Self Assessment return when you need to work out your rental profits, provided they are exclusively for the purposes of renting out your property. While the precise nature of these expenses will vary, you can deduct the following things from your tax bill if you pay for them:
- Maintenance and repair costs spent on the property. This does not include improvements. For example, fitting a new kitchen if the old one was still in good condition.
- Water, gas, electricity bills, and council tax.
- Replacing household items, such as cutlery, furniture, or hoovers. However, if the new item is an improvement of the old one, you can only claim a deduction for the cost of buying an item the same as the original. For example, if you are replacing a single bed and a new single bed costs £500, but you buy a new double bed for £750, you can only claim the first £500 as a deduction.
- The costs of removing items that have been replaced. For example, if you had to pay for someone to remove an old sofa, you can deduct those costs as an expense.
- Property-related insurance. This includes landlord insurance that covers buildings, content, and liabilities.
- Service costs, such as paying gardeners or cleaners. Again, this can only be claimed for maintenance purposes. For example, if you have a gardener entirely redo your garden for aesthetic improvement, you cannot claim that back.
- Fees charged by letting agents and property managers.
- Legal fees for lets that lasted a year or less.
- Accountancy fees.
- Ground rents.
- Business costs, such as phone calls, advertising, and stationery. Any costs that are not directly related to your property letting business cannot be claimed.
- Vehicle costs for business use.
To claim deductible expenses, you need to include them on your Self Assessment tax return and keep receipts and records of the expenses so they are ready to be evaluated by a tax inspector. Therefore, your Self Assessment return must have your total rental income and deductible expenses.
If your expenses bring your income below the taxable threshold, you will not need to pay tax on your rental earnings. If you are still above the taxable threshold after your expenses are accounted for, you will be taxed on your rental profits.
You must inform HMRC of any taxable profits you have from properties you rent. If you have not yet told them about your property rental, you must do so by October 5th, which follows the tax year in which you have taxable rental profits.
Taxable rental profits include the following thresholds:
- More than £2,500 after allowable expenses have been deducted.
- £10,000 or more before allowable expenses have been deducted.
The first £1,000 of your rental income is (usually) tax-free, as this is your property allowance. If you earn between £1,000 and £2,500 from your rental income, you should contact HMRC to find out if you need to pay any tax on your earnings.
You must keep a record of every expense you claim. You must keep records of receipts and correspondence related to your claims. These could be physical receipts, bank statements, emails, letters, etc.
To ensure your expenses are claimable, you need to keep a record of:
- the date and details of each expense
- any information you need to work out the amounts on your tax returns
- any correspondence you have with your tenants or tradespeople who provide a service
- any correspondence you have with HMRC
You must keep these records for three years from the end of the tax year in which they were made. If you are inspected by HMRC, and they find that you do not have historic receipts and records, this will not play to your advantage, and you may be fined.
Expenses landlords cannot claim back include:
- Interest paid on mortgage increases
- Personal expenses
- Capital expenditure
- Domestic items not previously owned
So let's take a closer look at each of these.
Interest paid on mortgage increases
If you increase your mortgage loan on your rented property, you previously were able to consider any additional interest on the loan as an expense. However, as of 2020, you can still claim some of the interest back, but the reimbursement comes in the form of a 20% tax credit instead.
Personal expenses that are not related to the management of your property cannot be claimed back. For example, any phone calls you make that do not pertain to your business cannot be considered deductible expenses.
Capital investments refer to anything you spend on your property that will add to its value or improve it for a long period of time. However, you can offset your capital costs against your Capital Gains Bills if you ever sell the property.
Domestic items not previously owned
As we saw earlier, you can claim tax relief on replacing existing domestic items, provided the item is solely for the use of the tenants and the old item is disposed of. You cannot claim relief for any new items you buy that are not replacing existing ones. So when you first furnish the house, none of the items can be deducted as expenses.
You can also only make claims for like-for-like replacements and not for upgrades.
If you claim expenses on items or services that are non-allowable and you are discovered by a tax inspector, you will have to repay any tax you owe to HMRC. If the inspector finds that you have repeatedly claimed illegitimate expenses over a sustained period, you may be fined or even face prosecution and jail time.
Rental income is charged the same rates of Income Tax as regular income. So if a landlord earns income from their day job and additional income from their lets, the two income sources are combined to set the rate of Income Tax that they must pay. If that total income takes you over one of the thresholds, you will pay the new rate on all earnings over that threshold.
One of the key differences between rental income and regular income is that rental income has an additional tax-free allowance of £1,000 (known as the 'property income allowance) on top of the tax-free Personal Allowance of £12,570 that everyone is entitled to.
So let's take a closer look at property income allowance and find out who is and isn't entitled to it.
The property income allowance is tax relief for people who rent out their property and have to declare the income they earn from it. It is worth up to £1,000 per tax year, which means that the first £1,000 you earn from your rent does not contribute to your income tax.
There are a few instances in which landlords cannot use the property income allowance. For example, you cannot use the property income allowance if you let a room in your house under the Rent a Room Scheme.
You also cannot use the property income allowance in a tax year in which you earn property or business income from the following sources:
- A company that is either owned or controlled by you or someone directly connected to you
- A business partnership in which you or someone directly connected to you
- Your employer or your spouse or civil partner's employer
If you own and let out a property overseas, you still need to pay tax in the same way you would for UK properties. The rules for deductible expenses are the same as well.
However, if you rent out an overseas property as a holiday let, the rules are different, as we will explore in the following section.
There are special rules for any income you make from renting properties that are considered furnished holiday lettings (FHLs).
If you let an FHL, you can:
- Claim reliefs on your mortgage interest costs by offsetting them against your business profits.
- Claim the income as pension contributions, meaning you will be liable for less tax.
- Claim capital allowances on all items bought for the sole use of the FHL.
- Claim Capital Gains Tax reliefs for trader costs.
To qualify as an FHL, your property must fulfil the following requirements:
- It must be situated in the UK or the European Economic Area (EEA).
- It must be furnished for regular occupation.
- It must be commercially let.
- It must be let for a minimum of 105 days a year.
- It must not normally be let to the same person for more than 31 consecutive days.
Landlords must pay Income Tax on their rental profits over a certain threshold. They can offset some of their allowable expenses against their profits, so long as they are solely for the purposes of the tenants and are not long-term investments in the property.
If you are a landlord and you want to deduct expenses from your rental profits, you must note the total expenses on your Self Assessment tax return and keep records of the expenses. Failure to do so could result in a fine or prosecution. Follow our list to make sure you only deduct allowable expenses.