One of the most frequent queries we receive revolves around what expenses can you claim against your rental income and the distinction between CAPITAL and REVENUE expenses. Many landlords unintentionally mix up the two, especially when differentiating between repairs and improvements or when claiming only the interest portion of their loan repayments and not the principal. A prevalent misconception is that any expenditure on the property can be directly offset against rental income.
Beware…!
Certain expenses never qualify for tax relief.
Some costs can only be offset against the profit when the property is sold.
There are expenses that can be subtracted from rental income to determine taxable earnings.
While some costs cannot be directly deducted, they do follow distinct regulations.
Let’s break it down step by step.
When you buy a property
The expenses related to the property’s acquisition are considered part of the purchase price and can’t be offset against rental earnings. We recommend compiling a clear list of all related costs as below:
- Purchase price
- Stamp Duty
- Legal Fees
- Building survey fees
- Independent evaluation fees
- Auctioneer’s fees (if you’ve made the purchase at an auction)
Most of these costs should be reflected in your solicitor’s completion statement. When the property is sold, these expenses can either reduce your gain or increase your loss. Ensure you maintain a comprehensive record, including all receipts, to avail the Capital Gains Tax relief on these expenditures upon selling.
What happens if the deal falls through?
In essence, any expenses related to a transaction that doesn’t materialize are not permissible deductions. If you consider purchasing a property, spend funds on legal services and surveys, but then either change your mind or the seller withdraws, you can’t claim tax relief for those expenses.
So what are the allowable costs against rental income?
The general rule is that the expenditure must be expended wholly and exclusively for the Rental Income business. Here’s a comprehensive list:
Finance costs (restricted for most residential properties)
In simple terms, the interest and setup fees on a loan obtained to buy or enhance a rental property, along with any bank fees for a distinct rental property bank account, are categorized as finance costs. If you have a repayment mortgage, only the interest component is considered as finance costs, not the entire repayments.
For commercial properties, Furnished Holiday Lettings (as mentioned earlier), and residential properties held by limited liability companies, 100% of the finance costs can be deducted.
However, for residential properties owned by individuals or partnerships, starting from 6th April 2020, there’s a limitation on these deductions. Only 20% of the finance costs can be set off against the tax on the net rental income after accounting for all other expenses and previous losses, but before considering finance costs. Before 6th April 2020, this restriction was introduced gradually over a span of three years.
To clarify this, let’s use an example:
Joe, a 49-year-old teacher and a taxpayer at the 40% rate, has bought a property for letting purposes as an investment. Since he has owned this property for a while, the remaining loan amount on it is quite minimal. Here’s how the finance cost deduction works for Joe:
| Actual Profit | Taxable profit | |
| Gross rents | 7,200 | 7,200 |
| Repairs and other tax deductible costs | 1,000 | 1,000 |
| Interest on mortgage | 2,500 | Nil |
| Net Rental profit | 3,700 | 6,200 |
| Tax at 40% | 2,480 | |
| Less interest relief at 20% on £2500 | 500 | |
| Net tax liability on rental income | 1,980 |
From the example, it’s evident that the actual tax rate is 53.51%, which exceeds Joe’s incremental tax rate of 40%. In cases where landlords have a significant amount of debt, their tax liability could surpass the net rent they collect.
For taxpayers in the basic rate bracket (20%), they should effectively get complete relief, as long as the pre-interest rental income doesn’t push them into a higher tax bracket.
Those in the higher tax bracket might contemplate buying new properties under a limited company since it allows full deduction of finance costs. However, it’s worth noting that loan interest rates tend to be higher for limited companies than for individuals.
Repairs and maintenance
You can deduct expenses for repairs on the property as long as they don’t qualify as capital enhancements. If you resided in the property before renting it out, any work done before it’s let out is generally regarded as upkeep due to personal use, not for rental activities. Hence, these costs are not deductible. However if you carry out works in readiness for letting they may be allowable and we can help you with assessing this.
For furnished residential rentals, repair costs for furnishings are not deductible.
Remember to factor in the cost of the gas safety certificate, if relevant.
Legal, management, and accountancy fees
Legal fees related to the acquisition of the property or for the initial lease spanning more than a year are not deductibl against rental income. However, you can deduct legal expenses associated with lease renewals, short-term tenancies of under a year, tenant evictions, rent collection, property management, and accounting services.
Insurance
It is vital that you insure the property and the premium for the buildings and contents can be claimed. Similarly insurance for boiler breakdown cover o rent guarantee is allowable. Life assurance premiums are not claimable.
Rent, rates, and council tax
If your property is an apartment, you might be responsible for ground rent. Typically, the tenant covers the rates or council tax. However, if you end up bearing these expenses or if there are gaps in tenancy when you cover these costs, you can deduct them.
Services
Should you incur service charges or other related expenses due to the rental, like electricity for shared spaces, you can deduct these costs. For properties categorized as furnished holiday rentals, you might typically cover costs like electricity, gas, water, TV licensing, telephone, and additional services.
Wages
If you require regular services such as cleaning, it’s advisable to pay a flat fee for the service and not provide any tools or materials. This approach helps in categorizing them as self-employed. Conversely, if you hire, for instance, a cleaner for an hour weekly and supply all the necessary materials, this individual would likely be considered an employee. It’s essential to recognize that if you have an employee, you must adhere to Employment Regulations, including the Working Time Directive, National Minimum Wage, Health and Safety, and PAYE/NIC.
Travelling expenses
Do you visit the property for maintenance or to address tenant concerns? If yes, you can deduct your travel expenses. However, these claims should be justifiable. For instance, if you reside in London and take a week-long vacation in Cornwall, a brief 10-minute check on a neighboring holiday home doesn’t transform your vacation into a business journey. For car travel, you’re eligible to claim the approved mileage rates, which are set at 45p for the initial 10,000 business miles in a tax year and then 25p for every subsequent business mile.
Administration expenses
This might encompass costs such as postage, office supplies, phone calls, and other related administrative expenses. The guidelines for deducting home office usage underwent changes starting 6th April 2013. You can either opt for an intricate calculation to validate the charge or claim based on the number of hours spent working in a home office, as outlined below:
| Number of hours
worked per month |
Monthly claim |
| 25 or more | £10 |
| 51 or more | £18 |
| 101 or more | £26 |
It is unlikely that a charge for using your home as an office can be justified unless you are managing a number of properties yourself.
Other expenses
You can deduct any other expenses that are solely for the purpose of your property business. For instance, the licensing fee for Houses of Multiple Occupation (HMO) is deductible.
Property income allowance (alternative to expenses and capital allowances)
You can subtract the property income allowance of £1000 from your rental earnings, as long as the income isn’t from an affiliated entity. Opt for this allowance only if your expenses are under £1000 and they’re less than the total rent collected. If you choose the Property Income Allowance, you won’t be eligible to claim any other expenses. This provision is primarily to benefit those with minimal rental income, ensuring they don’t have to report and pay taxes on it, rather than serving as a broad tax-saving mechanism.
Capital expenditure
Expenses related to buying or enhancing a property, such as adding an extension, cannot be deducted as operational costs from your property income. Drawing a line between capital and operational expenses isn’t always straightforward. For instance, if you purchase a property and merely spruce it up before renting, this is generally viewed as an operational expenditure. On the other hand, if you acquire a property at a notably reduced rate due to its dilapidated state and then undertake significant renovations, such spending would likely be deemed capital expenditure.
Nonetheless, most capital expenses can be claimed for Capital Gains Tax relief when you eventually sell the property. Hence, maintaining detailed records and retaining receipts of all expenses is crucial.
Capital allowances (not available on residential lettings apart from furnished holiday lets)
Although expenses for structural work typically aren’t deductible, you can claim capital allowances for buying fixtures, plant equipment, and machinery. An Annual Investment Allowance covers expenses up to £1,000,000 from 1st January 2019 to 31st December 2021, after which it returns to £200,000. Given that most property owners won’t exceed this yearly threshold or file claims for vehicles, we won’t delve into the details of vehicles or expenses surpassing the yearly cap.
Here are examples of costs that qualify for the Annual Investment Allowance (not applicable to residential properties):
| Cookers
Washing machines Dishwashers Refrigerators Electrical systems |
Washbasins
Sinks Baths Showers Water systems |
Furniture
Carpets Curtains Boilers Heating systems |
Storage equipment
Counters Machinery Lifts Alarm systems |
This list isn’t comprehensive, and we recommend seeking additional guidance from us, especially if your spending surpasses the annual threshold.
When selling an asset for which you’ve previously claimed Capital Allowances, the sale proceeds are considered, which could lead to an extra income charge.
Replacement of Domestic Items relief
For residential properties that aren’t classified as Furnished Holiday lets or where no Rent a Room relief is claimed, costs incurred in replacing furniture and white goods can be deducted as expenses, minus any earnings from selling the item being replaced. However, expenses related to assets that aren’t replacements are not eligible for deductions.
Private use
If the property is utilized for personal reasons, commonly the case with furnished holiday lettings or if you’re not applying for Rent a Room relief in your residence, then any claimed expenditure must be adjusted for this personal usage.
Should you have previously lived in the property, expenses associated with that time can’t be claimed. Thus, any upkeep done before its first rental is considered personal. On the other hand, if, for example, you paid an annual insurance premium on 1st April and departed the property intending to rent it out by the next 1st October, you could deduct half of the insurance premium even if it was paid during your residency.
Finally…
Many landlords find this aspect perplexing. Mistakes can be expensive, especially if noticed by HMRC. Engaging a property tax expert could potentially save you a significant sum. Reach out if you require assistance.
DISCLAIMER
© Thandi Nicholls Ltd 2023 All Rights Reserved – The above articles are provided for guidance only and may not cover your personal circumstances so you should not rely on them. It is important that you seek appropriate professional advice that takes into account your personal circumstances where you can provide the full facts of the case and all documents related to your case. Thandi Nicholls Ltd t/a uklandlordtax.co.uk, S S Thandi, and M S Bains cannot be held responsible for the consequences of any action or the consequences of deciding not to act.