With over 4.6 million rental properties in the UK, the competition is fierce, and landlords are always seeking the most tax-efficient ways to manage expenses for maximum profit.
As you prepare for the 2024 tax season, be aware that HMRC allows multiple deductions against your rental income, potentially saving you thousands of pounds. Maximising these write-offs while keeping accurate records gives your bottom line a healthy boost.
Read on to learn about the top 7 rental income expenses allowed that you can leverage in the coming tax year.
Key Summary
- Interest on mortgages, bank charges, and application fees are tax-deductible, helping landlords reduce taxable rental income.
- Fees for property management, bookkeeping, and specific legal actions (like tenant evictions) qualify for deductions, though fees related to property purchases do not.
- Routine property repairs and maintenance activities, including replacements of items like appliances, can be claimed as deductible expenses.
- Building, contents, and landlord insurance specific to rental properties are fully deductible, while personal insurance types are excluded.
- Travel for property management purposes and administrative costs, such as advertising and office supplies, are allowable deductions under HMRC rules.
What You Must Know About Landlord Tax Deductions
When determining allowable expenses on rental income, there are many nuances as to what qualifies and what doesn’t. So, before we get to our list of allowable expenses, let’s start by clearing the air on how tax on rent income works!
- Any expenses incurred for the sole purpose of earning rental income are tax deductible. This includes property maintenance, repairs, utility bills, insurance premiums, letting agent fees, and mortgage interest. However, improvement costs that increase the property’s value are not deductible and must be claimed as capital allowances.
- Certain types of expenditure do not qualify for tax relief at all. This includes any costs associated with a failed property deal and depreciation of the property.
- Some expenses are only deductible when calculating your capital gains tax bill upon selling the property. These include solicitor’s fees, surveyor’s fees, and estate agent’s fees.
- Expenses that may not be claimed as a deduction but are subject to other rules include capital allowances for assets used in the property, loss relief, and private use. Always check with a tax professional to determine if any portion of these expenses can be deducted.
- Keep accurate records of all expenses, including receipts and invoices. These records must be kept for at least 22 months from the end of the tax year in which the expenses were incurred. Failure to keep adequate records can result in the expenses being disallowed.
Understanding the basics and keeping diligent records will help ensure you take advantage of all the tax benefits available to you. Continue reading to learn about the different allowable rental deductibles in the UK.
7 Allowable Expenses On Rental Income
The following are the major landlord allowable expenses in the UK:
- Finance costs
- Management, accountancy and legal fees
- Repairs and maintenance
- Insurance
- Service and wages
- Administrative expenses
- Travelling expenses
1. Finance Costs
As a landlord, one of your largest ongoing expenses will be the finance costs associated with purchasing and maintaining your rental property.
These costs typically include:
- Interest on Mortgages and Loans: If you have a mortgage or loan on the property, the interest you pay each year is deductible. For repayment mortgages, only the interest portion of payments qualifies, not the total repayment amount.
- Arrangement and Application Fees: Any fees charged by your lender to set up or make changes to your mortgage are deductible finance costs. This includes renewal fees when your fixed-rate mortgage term ends.
- Bank Charges: Fees charged by your bank for maintaining separate rental accounts for your rental income and expenses are also deductible. This includes monthly account fees as well as individual charges for deposits, withdrawals, transfers, and statements.
2. Management, Accountancy and Legal Fees
One area often overlooked by landlords when deciding what expenses are deductible is fees relating to property management and administration.
Any legal fees in connection with the renewal of a lease, a shorthold tenancy of less than one year, eviction of tenants, or rent collection are all claimable. However, you cannot claim any legal fees in connection with the initial purchase of the property or any fees for the initial lease if it is for more than one year.
Other landlord tax deductions include accountancy and management fees. Accountancy fees include the costs for bookkeeping, invoicing tenants and preparing tax returns, while management fees cover the daily operations of the property.
One of the property investment tips to ensure accountability is to hire property management companies. They handle the day-to-day running of your rental property.
Their services may include:
- Finding and screening prospective tenants
- Preparing leases and tenancy agreements
- Collecting rent and security deposits
- Conducting inspections
- Handling maintenance, repairs, and emergencies
Using a property management company can save you time and hassle. Fees typically range from 10% to 15% of the rental income; for example, our partner, Redstone, charges only 10%.
In summary, you may face legal fees for various reasons, such as evicting non-paying tenants or renewing a lease, and these are tax-deductible. On the other hand, legal fees for purchasing a property are not deductible since they don’t relate to the ongoing property management and administration. Be sure to keep records of all invoices and receipts to claim eligible landlord tax deductions.
3. Repairs and Maintenance
As a landlord, you are responsible for ensuring your rental property remains in good working condition for your tenants. The costs incurred to repair and maintain the property can potentially be deducted from your rental income to calculate your taxable profits.
General repairs, such as fixing leaking pipes, repairing electrical faults, cleaning gutters, and repairing appliances, can typically be claimed as tax-deductible expenses. For example, if you had to call out a plumber to fix a leaking pipe or repair a boiler in the rental property, the invoice for this work is an allowable expense. Repairs can be subdivided into maintenance and replacement of domestic items.
Property Maintenance
The cost of maintenance and capital expenses, such as painting, re-plastering walls, replacing flooring, and gardening services, can be deducted from your taxable rental income. For instance, if you hire a gardener to mow the lawn and maintain the garden on a regular basis or have the property re-carpeted between tenancies, these costs qualify as tax-deductible property maintenance expenses.
Replacement of Furnishings
The replacement of furnishings such as cookers, washing machines, beds, and sofas that wear out or break down over time can be claimed as a tax-deductible, allowable expense, provided these are supplied as part of the tenancy. For example, if you have to replace an old washing machine that came with the property because it is no longer repairable, the cost of the new machine qualifies as one of the many landlord allowable expenses.
4. Insurance
As a landlord, certain insurance premiums for your rental property are tax deductible in the UK. The costs of building insurance, contents insurance, and landlord insurance can be claimed as deductions from your rental income.
Buildings Insurance
This covers the structure of your rental property, including the roof, walls, and permanent fixtures. The premiums paid for building insurance on your rental property are fully tax deductible. For example, if your annual building insurance costs £500, you can deduct the full £500 from your rental income when filing your tax return.
Content Insurance
This protects the belongings inside the property, such as furniture, appliances, and decor. The premiums for contents insurance on a furnished rental property are also tax deductible. If you pay £200 per year for contents insurance, you can deduct all £200 as an expense. However, for an unfurnished property, contents insurance premiums cannot be claimed.
Landlord Insurance
Also known as rent guarantee insurance, landlord insurance protects you in case your tenants fail to pay the rent. The premiums for this specialised insurance are tax deductible. For instance, if your annual landlord insurance policy costs £350, the full £350 can be deducted from your taxable rental income.
Note: Life assurance premiums, home insurance, and personal liability insurance are not tax deductible for landlords. Only insurance that is solely for your buy-to-let property qualifies for tax relief.
5. Service and Wages
If you pay any service charges or for utilities in common areas like hallways or gardens, these costs should be claimed as expenses for rental property. For example, charges for cleaning, gardening and security are all deductible expenses.
Provided you pay under £123 weekly, have no extra employees, and your employee ticks certificate A or B on the Starter Checklist, you can retain the checklist and deduct wages. However, if you pay at least £123 weekly, have multiple employees, or your employee marks certificate C, you must register for PAYE (Pay As You Earn) and pay taxes on employees’ wages.
Under PAYE, you must pay your employee and report their wages to HM Revenue & Customs (HMRC) every time they are paid, even if they earn below £123 weekly. Failure to operate PAYE when required can result in penalties. HMRC may check your records to ensure you are calculating PAYE properly.
To summarise, as a landlord, you can deduct the following:
- Service charges for utilities, cleaning, landscaping, etc.
- Employees’ wages (under PAYE if over £123/week)
- National Insurance contributions on employees’ salaries
- Required workplace pension contributions for employees
Keeping meticulous records of all expenses and wages related to your rental property will ensure you maximise take advantage of the various landlord tax breaks and avoid legal issues with HMRC. With prudent expense management, your rental income property can generate solid profits and benefit from tax deductions for years to come.
6. Administrative Expenses
As a landlord, certain administrative expenses incurred in connection with your rental property are tax deductible. These costs are necessary to effectively manage your property and generate rental income.
Some examples of deductible administrative expenses include:
- Postage and Shipping: The cost of mailing correspondence to tenants, suppliers, and others regarding the management and maintenance of your rental property.
- Stationary and Office Supplies: The cost of paper, pens, printer ink, and other supplies used specifically for your rental property.
- Telephone and Internet: A portion of your phone and internet bill that corresponds to rental-related calls and online activities. You must allocate based on reasonable and consistent methods, such as the number of lines or data used for personal versus rental purposes.
- Advertising: The cost to advertise your rental property to attract new tenants, including listings on websites, in newspapers, or with real estate agents.
To claim these and other expenses back, you must keep organised records of receipts, invoices, statements, and other documents to verify the costs. Administrative expenses are fully deductible in the tax year paid or incurred to generate rental income. By staying on top of your records and eligible deductions, you can help reduce your tax burden as a landlord.
7. Travelling Expenses
If you travel to a property location to carry out maintenance or resolve issues with tenants, you should claim Mileage Allowance Payments (MAPs) when filing taxes for rental property deductions. Property owners who travel by car can claim the authorised mileage rates: 45p per mile for the first 10,000 business miles in a tax year and 25p per mile for each extra business mile.
For example, if you travel 100 miles in your car to deal with repairs at the rental property, you can claim 100 x 45p = £45. The same applies if you use public transport, while motorcycles and bikes have a flat rate of 24p and 20p per mile, respectively.
Hotel stays can also be deducted if you have to stay overnight to deal with emergencies or repairs. The costs for meals during your trip may be deductible, too. To qualify as a valid expense, the primary purpose of your trip must be to manage your rental property; personal travel expenses are not tax deductible.
If you plan to claim rental expenses allowable for a vehicle, you’ll need to keep records of the vehicle make and model, dates of travel, locations travelled to and from, reasons for travel, and mileage. HMRC may request to see these records to verify your claims. It’s best to keep a dedicated logbook for your rental property travel and expenses.
Special Note to Landlords: You probably already know that location is a key factor to consider when building a property portfolio. However, without adequate knowledge of the market, choosing a profitable location can be challenging — that’s where we come in at Baron & Cabot. We will not only help you with the most viable location using our knowledge of the market, but also guide you through your investment journey to ensure maximum profitability. Contact us now to learn more.
Frequently Asked Questions
Can you offset storage costs against rental income?
Yes, you can offset storage costs against rental income. However, they must meet the key criteria of being “wholly and exclusively” incurred for your property business for them to qualify as allowable expenses.
Can I claim a new kitchen on a rental property?
Yes, you can claim a new kitchen on a rental property as deductible when you want to pay tax, provided you’re replacing old items with like-for-like new ones. However, adding extra items like kitchen units or sockets that didn’t exist previously in the property is considered an improvement (capital expenditure) and not deductible.
What expenses can I claim when selling a rental property?
When selling a rental property, you can claim allowable expenses on the cost of replacing domestic items from your rental income or council tax. This reduces your net profit for the year, potentially lowering your own income tax liability further. Take note, however, that these deductions only apply to replacement items, not new additions.
Conclusion
As a landlord in the UK, there are numerous ways to maximise your tax savings, and a critical one is claiming income expenses tax relief. To achieve this, understanding rental income expenses allowed is key, and we’ve listed out 7 essential ones in this guide.
Capitalising on these deductions could significantly increase your net profit. However, it’s crucial to maintain accurate records of all your expenditures and consult with a tax professional to ensure you’re claiming tax relief correctly. Don’t forget to consult Baron & Cabot for expert recommendations when purchasing your next property!
Disclaimer: Any information provided by Baron & Cabot does not constitute financial advice and is for educational purposes only.
