Landlord allowable expenses: what you can deduct

Landlord allowable expenses are costs you can deduct from rental income when working out taxable rental profit, as long as they are wholly and exclusively for renting out the property. GOV.UK lists common deductible costs (repairs, bills you pay, agent and legal fees) and also sets out what you cannot claim and how long to keep records.

What counts as rental income for tax purposes?

GOV.UK defines rental income as the rent you get from your tenants. It also says rental income includes certain other payments connected to the let, such as payments for the use of furniture and charges for additional services you provide.

This matters because you start with your rental income figure, then take off the expenses or allowances you can claim to arrive at your profit for tax.

• Rent from tenants.
• Payments for the use of furniture.
• Charges for additional services you provide (for example cleaning of communal areas, hot water, heating, repairs to the property).

How do allowable expenses reduce your taxable rental profit?

GOV.UK explains that you pay tax on profit from renting out property, and that profit is what is left after you add up your rental income and take away the expenses or allowances you can claim.

It also explains how profits and losses are treated where you rent out more than one property, including that UK property profits and losses are added together for your property business, while overseas property results must be kept separate from UK properties.

Which landlord allowable expenses can you deduct from rental income?

GOV.UK says you can deduct expenses from your rental income when you work out your taxable rental profit as long as they are wholly and exclusively for the purposes of renting out the property. It then gives a list of the main types of expenses you can deduct, if you pay for them yourself.

• General maintenance and repairs to the property.
• Water rates, council tax, gas and electricity.
• Insurance, such as landlords’ policies for buildings, contents and public liability.
• Costs of services, including the wages of gardeners and cleaners.
• Letting agent fees and management fees.
• Legal fees for lets of a year or less, or for renewing a lease for less than 50 years.
• Accountant’s fees.
• Rents (if you’re sub-letting), ground rents and service charges.
• Direct costs such as phone calls, stationery and advertising for new tenants.
• Vehicle running costs (only the proportion used for your rental business) including mileage rate deductions for business motoring costs.

It also states you can claim expenses for the interest on a mortgage to buy a non-residential let property.

What expenses can you not claim, and how do part expenses work?

GOV.UK lists expenses you cannot claim a deduction for. These examples are useful because they show how HMRC draws the line between business costs and private or capital costs.

• Enhancements or improvements to the property which are capital expenditure unless they qualify for replacement of domestic items relief.
• The full amount of your mortgage payment, only the interest element of your mortgage payment can be offset against your income.
• Private telephone calls, you can only claim for the cost of calls relating to your property rental business.
• Clothing (with an example that buying a suit for a meeting relating to your property rental business is not allowable, because it is partly private).
• Personal expenses, you cannot claim for any expense that was not incurred solely for your property rental business.

If only part of a cost relates to your property business, GOV.UK says you can deduct that part, as long as it is wholly and exclusively for the property business. In practice, that means you need records that show how you worked out the business proportion.

Repairs, improvements, and replacement of domestic items: what HMRC says

Repairs are a common area of confusion because not everything you spend on a property is an allowable repair. GOV.UK says allowable expenses include the costs of maintenance and repairs to the property (but not capital improvements). It also defines a repair as something that restores an asset to its original condition, sometimes by replacing parts of it.

Examples of repairs in the GOV.UK guidance

• Replacing roof tiles blown off by a storm.
• Replacing a broken-down boiler.
• Redecoration between tenants to restore the property to its original condition.

GOV.UK also says replacing a part of the property with the nearest modern equivalent is still a repair if the improvement is incidental to the repair, such as replacing a single-glazed window with a double-glazed window.

If an insurance pay-out (or money kept from a tenancy deposit scheme) covers some of the cost, GOV.UK says you can only claim the additional expenses you incurred for repairs which the insurance pay-out did not cover, or expenses incurred for repairs in excess of the amount of the deposit that you kept.

For furnished items, GOV.UK says you cannot claim the costs for replacing furnishings or equipment in a property as maintenance and repairs, but from 6 April 2016 they may qualify for replacement of domestic items relief.

Replacement of domestic items relief (residential property)

GOV.UK explains that if you let out residential property (a dwelling house) you may be able to claim a deduction for the cost of replacing domestic items such as movable furniture, furnishings, household appliances, and kitchenware. The relief is only available for expenses incurred from 6 April 2016 for Income Tax purposes.

It also lists conditions for when you can claim this relief, and when you cannot. For example, GOV.UK says you cannot claim this relief if you are renting a room in your home, or for the initial cost of buying domestic items for a dwelling house.

Where the replacement item is an improvement, GOV.UK says you can only claim a deduction for the cost of buying an item the same as the original. It gives an example using £400 and £550 to show how only the equivalent cost is deductible, with no relief for the difference.

Finally, GOV.UK sets out the steps for working out the amount of deduction, including adding the cost of the new replacement item and any incidental costs, then deducting any amounts received on disposal of the old item.

Property allowance and capital expenses: what to watch for

GOV.UK explains there is a property allowance that you can claim, and that it gives you up to £1,000 a year tax-free property income. It also says if you claim the property allowance you cannot claim a deduction for your expenses. This is an either or choice, so it is worth keeping records either way so you can work out what is best for your situation.

On capital expenditure, GOV.UK says capital expenses are not allowable and cannot be claimed against your rental income. It gives examples of capital expenses that would not normally be allowable, such as adding an extension, installing a security system if there was not one before, or replacing a kitchen with one of a higher specification. GOV.UK also says you should keep records of capital expenses because you might be able to set them against Capital Gains Tax if you sell the property in the future.

What records should landlords keep, and for how long?

GOV.UK is clear that you have to keep accurate records of rent received and your expenses incurred to work out the profit you will pay tax on. It also says your records must separate your income from fully-furnished lettings and unfurnished or part-furnished lettings.

The guidance suggests the kinds of records you should keep, including rent books, receipts, invoices, bank statements, and mileage logs (for journeys that are solely for your property business purposes).

On retention, GOV.UK says you must keep your records for at least 5 years after the 31 January tax return deadline for each tax year. It also says HMRC can charge you a penalty if your records are not accurate, complete and readable or if you do not keep them for the required period of time, and you may also have to pay a penalty if you submit an inaccurate tax return. Having one place to track income, expenses, and documents makes this much easier day to day.