In the UK, Landlords are required to pay tax on the profit made from renting out a property. A Landlord can reduce their tax bill by deducting allowable expenses from their rental income.
If you are a landlord, it is important that you are aware of expenses you can and cannot claim from your rental income. An allowable expense is classed as anything which you have spent wholly and exclusively for the purpose of renting out the property.
In some circumstances part expenses can be claimed, where a proportion of the expense incurred relates to your property business. For example, if you bought a lawn mower and it was used at the rental property and at your own property then it could have a proportion of the expense claimed.
What expenses can be claimed as a landlord:
- General maintenance and repairs to the property (but not improvements)
- Anything bought for the sole purpose of the property
- Water rates, council tax, gas, and electricity
- Insurance costs
- Letting agent and property management fees
- Costs incurred from phone calls and advertising for new tenants
- Mileage, when driving to and from property for inspections, to carry out repairs or to collect rent
- Courses which enhance your existing knowledge as a landlord
- Qualifying legal and accountancy fees
- Ground rents and service charges
What a landlord cannot claim:
- Personal expenses
- The full amount of mortgage payments
- Private telephone calls
- Any clothing which was primarily bought for business purposes
Mortgage tax relief (for individuals)
The tax relief on mortgage costs for residential landlords has been restricted to the basic rate of tax since April 2020. This has been phased in over several years. The new system is less favourable to the higher band taxpayer.
A landlord getting £10,000 in rent and paying £9,000 in mortgage interest payments will end up paying tax on the full £10,000 – though the amount will still depend on their tax bracket.
They will then be able to deduct £1,800 from their tax bill due to the 20% tax credit, leaving them with the final overall tax bill on their rental income.
It should be noted that this restriction does not currently apply to corporate landlords, serviced accommodation or holiday lets.
Replacement of Domestic Item Relief
The Replacement of Domestic Item Relief replaced the Wear and Tear Allowance in April 2016. The Replacement of Domestic Item Relief allows landlords the ability to claim tax relief when they replace furniture, furnishings, appliances, and kitchenware in a rented property. You can only claim for items that are like for like replacements and of similar value. The item must be solely for the use of the tenant in the rented property.
Any money that has been spent improving and enhancing is classed as capital expense. These expenses cannot be claimed as revenue expenditure against property income but can usually be offset against any Capital Gains Tax when selling a property.
Reporting allowable expenses
If you have taxable profits from the property, you rent out then you need to inform HMRC. You will normally have to complete a Self-Assessment Tax Return. Broadly, all receipts and expenses are treated as one business, regardless of the number of UK property that you are renting out (although restrictions may apply if one or more properties are let at a peppercorn rent). To work out your profit you need to add all your rental income together and calculate your allowable expenses. Then deduct the expenses from rental income.