Landlord Tax: Allowable Expenses
As a landlord, you can reduce your tax bill by deducting a number of expenses that you might incur as a result of letting out a property. These are known as allowable expenses.
Why should you claim property expenses? The simple answer is this - every penny spent on
your property reduces its profit, which reduces your rental income, ultimately reducing your
tax liability! You pay tax on the total rental income earned, after deducting any allowable
Allowable expenses are simply things that you are required to spend money on as a direct
result of running your property, as long as they are “wholly and exclusively for the purposes of renting out your property.” So, what expenses can you claim?
- Lettings agents fees: If you pay a lettings agent to market your property, their fees are
- Legal fees : These can only be claimed for fees associated with lets of a year or less OR
for renewing a lease of less than 50 years
- Accountants fees
- Landlord insurance (buildings, contents)
- Ground rent and Service charges
- Council Tax, Utilities
- The cost of services such as the wages for gardeners or cleaners
- Maintenance and repairs (home improvements are not considered an allowable
The law states that “repairing a worn or dilapidated asset is normally an allowable expense” so ask yourself, is the repair/replacement like for like? Is it general maintenance? e.g replacing a broken boiler with the nearest modern day equivalent “replacing the whole or the 'entirety' of an asset is not a repair it is capital expenditure and not an allowable expense.“
Capital expenditure is when you spend money in order to enhance/provide a lasting benefit to the property e.g renovating a property or adding an extension would be classed as capital expenditure, and not deductible. You should keep a record of capital expenses as you might be able to set these against capital gains tax if you were to sell your property.
Landlords can also benefit from ‘replacement of domestic items ’ tax relief. Domestic items
include moveable furniture, furnishings, household appliances and kitchenware, e.g:
● Washing machines
● Crockery and Cutlery
You must ensure that:
1. The item was purchased solely for the use of the tenant in the property
2. The item replaced is no longer used in the property, i.e the old fridge
What expenses cannot be claimed?
-Personal expenses: you cannot claim for an expense that isn't incurred solely for your property business
- Mortgage repayments: The full amount of your mortgage payment is not an expense you can claim
Can you claim the interest on your mortgage payments? Yes you can, however there is
restricted tax relief on mortgage interest payments. They are no longer classed as an allowable expense and are not deductible from your rental income. From April 2017 landlords are only able to claim tax relief at the basic rate of 20%. As an example, Sam will pay tax on her rental income minus any allowable expenses minus the tax relief on the mortgage interest at 20%, rather than being able to minus the full interest amount.
Working out your taxable profits:
● Add together your rental income
● Add together your allowable expenses
● Deduct the expenses from your rental income
The rate of tax you will pay is dependent upon your total income for the year and how much of your income falls within each tax band!
Being a landlord comes with huge responsibility and a whole lot of rules and regulations to
adhere to. It can be difficult to judge what tax deductions you can claim, and so it is a good idea to entrust in your accountant for guidance. Your accountant can ensure that you are keeping on top of your finances and that your property business is running as tax efficiently as possible.
They will also help report your taxable profits to HMRC correctly.
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