What are the allowable costs against rental income?

If you rent out property, you may need to complete a self assessment tax return and pay tax on your rental income. However, you can reduce your taxable profit by claiming allowable expenses against rental income.

In this blog, we will explore the allowable expenses for landlords, including repairs, insurance, and management fees. Knowing what qualifies as allowable expenses against rental income can significantly lower your tax bill.

Check allowable expenses for rental income to maximise your profits and ensure compliance with HMRC regulations. Understanding these deductions is essential for every landlord looking to optimise their finances.

What are allowable expenses for landlords?

As a landlord, you can claim various allowable expenses for landlords to reduce your taxable rental income. These expenses must be incurred wholly and exclusively to rent out your property. Common allowable expenses against rental income include maintenance and repairs, insurance premiums, and letting agent fees.

By deducting these costs from your rental income, you can significantly lower your landlord tax bill. For instance, if you earn £15,000 in rental income and have £5,000 in allowable expenses, you would only pay tax on £10,000.

Understanding these deductions is important for optimising your profits and ensuring compliance with HMRC regulations.

Expenses you can claim as a landlord

Landlords must know the rules surrounding allowable expenses for landlords to maximise their tax deductions. For an expense to qualify, it must be incurred wholly and exclusively for the rental property, excluding any personal use. Common allowable expenses include maintenance, insurance, and professional fees, which directly relate to managing rental income.

Specific allowable expenses encompass mortgage interest and council tax, which can help reduce taxable profits. Understanding these categories ensures landlords can effectively claim allowable expenses for rental income, ultimately lowering their tax bills and improving profitability. Keep accurate records to substantiate your claims and optimise your tax position.

What common allowable expenses can I claim as a landlord?

As a landlord, knowing the common allowable expenses for landlords is important for maximising your rental income and minimising your tax liability. Here are some common allowable expenses you can claim:.

Repairs and maintenance

You can claim costs for repairs that keep your property in good condition. This includes fixing leaks, repairing appliances, and general maintenance tasks. However, improvements that enhance the property’s value are not deductible.

Property management fees

If you hire a property management company to handle your rental, their fees are allowable expenses against rental income. This can include costs for tenant placement and ongoing management services.

Utilities and services

While tenants typically pay utilities, if you cover these costs during void periods, such as gas, electricity, or water, you can claim them as allowable expenses.

Business rates

Any business rates or council tax you pay on the property can be deducted from your rental income. If the property is unoccupied, these costs may still qualify as allowable expenses.

Insurance

Landlord insurance premiums, including buildings and contents insurance, are allowable expenses. This also covers warranties and breakdown covers for essential appliances like boilers.

Gardening and cleaning

Expenses related to maintaining the property’s exterior or cleaning between tenants are deductible. Regular gardening services or one-off deep cleans can be claimed as necessary upkeep.

Other services

If you provide additional services to your tenants, such as internet or cable TV, the associated costs can also be claimed. This includes any other services that enhance the rental experience.

By keeping track of these allowable expenses against rental income, you can effectively reduce your taxable profit and improve your overall financial position as a landlord. Always ensure that expenses are wholly and exclusively for the rental property to qualify for deductions.

What Specific Allowable Expenses can I claim as a landlord?

As a landlord, knowing the specific allowable expenses you can claim is essential for maximising your rental income. Here are the key categories of expenses that are tax-deductible:

Landlord service charges:

You can claim service charges directly related to your rental property, including

• Agents’ commissions
• Fees for tenant sourcing and inventory management
• Property management fees
• Charges from flat management companies or residents’ associations

Travel expenses

If you need to visit your property for inspections or meetings, you can claim travel expenses. Keep accurate records of these trips to ensure you can substantiate your claims.

Property repairs & renovations

Expenses for repairs and maintenance are allowable, including:

• Repairs – Restoring existing features, such as repainting or fixing plumbing.
• Renewals – Replacing existing items like dishwashers or carpets.
• Improvements – While improvements increase property value and can’t be deducted against rental income, they may reduce capital gains tax when selling.

Mortgage interest

You can claim the interest on buy-to-let mortgages as an allowable expense against your rental income. However, capital repayments are not deductible.

Council tax and ground rent

If you pay council tax or ground rent for your rental property, these costs can be claimed as allowable expenses. If tenants cover these costs, you may still claim them during any vacancy periods.

Advertising for tenants

Costs associated with advertising your property for rent are deductible. This includes online listings and promotional materials.

Legal and professional fees

Fees for legal services related to your rental activities, such as lease agreements or eviction processes, can be claimed. Additionally, professional fees for accountancy services are also allowable.

Other direct costs

Any other costs directly related to managing your property can be claimed. This includes:

• Stationery and office supplies
• Phone calls related to rental business activities

By keeping thorough records and understanding these allowable expenses for landlords, you can effectively reduce your taxable rental income and enhance your overall profitability.

Capital Allowances

Capital allowances are a form of tax relief that allows landlords to claim deductions on certain capital expenditures related to their rental properties. This includes costs for plant and machinery used within the property, helping to reduce taxable profits and lower tax liabilities.

How capital allowances apply to rental properties?

• Qualifying expenditures: Landlords can claim capital allowances on items like heating systems, electrical installations, and other integral fixtures.
• Furnished holiday lets: These properties may qualify for capital allowances, as they are treated as commercial activities.
• Commercial properties: Owners of commercial rental properties can also benefit from capital allowances, which can be offset against their rental income.

By effectively utilising capital allowances, landlords can enhance their financial position and maximise allowable expenses against rental income. It’s essential to keep detailed records of all qualifying expenditures to support claims for capital allowances. This approach not only optimises tax relief but also aids in better cash flow management for property owners.

What expenses you can’t claim as a landlord?

As a landlord, knowing what expenses you cannot claim is essential for managing your finances. Certain costs are considered non-deductible and do not qualify as allowable expenses for landlords. Here are key expenses you cannot claim against your rental income:

Capital expenditure

Costs related to purchasing a property, making improvements, or buying furnishings are not allowable. For instance, adding an extension or upgrading fixtures increases property value and is classified as capital expenditure.

Personal expenses

Any costs unrelated to your rental property cannot be claimed. This includes personal mobile phone bills or household expenses that don’t directly pertain to managing your rental.

Clothing

Even if you purchase clothing specifically for property-related work, such as overalls, these costs are not deductible.

Full mortgage payments

While you can deduct mortgage interest, the full repayment of the mortgage itself is not an allowable expense.

Travel costs

Regular travel between your home and rental properties is not deductible unless it’s specifically for property management tasks.

By avoiding claims on these non-deductible expenses, landlords can ensure compliance with tax regulations while effectively managing their allowable expenses for rental income. Always keep accurate records to support your claims and consult a tax professional for guidance.

What if I am paying a mortgage on my rental property?

If you are paying a mortgage on your rental property, it’s essential to know how it affects your tax situation. While you cannot deduct mortgage payments directly from your taxable rental income, you can claim a 20% tax credit on your mortgage interest payments. This credit applies to the lower of:

• Your total finance costs
• The net profit before finance costs
• Your adjusted total income for the year

Additionally, keep accurate records of all rental income and expenses to substantiate your claims. By understanding these rules, you can effectively manage your allowable expenses for landlords and optimise your tax position on rental income.

Interest & finance charges

Interest and finance charges are significant expenses for landlords when managing rental income. Tax relief is available on costs associated with loans used to purchase property or release equity, including interest, arrangement fees, and bank charges. However, capital repayments are not deductible.

Since April 2020, tax relief for mortgage interest has been limited to a basic rate tax credit of 20%. This means landlords cannot deduct mortgage interest from their rental profits as before. Instead, they receive a tax credit based on their finance costs, which can impact overall tax liabilities, especially for higher-rate taxpayers. Keeping clear records of these expenses is essential for accurate tax reporting.

Property income allowance

If you earn less than £1,000 a year from letting out a rental property, you don’t need to inform HMRC. This is a £1,000 tax-free property allowance. You should contact HMRC if your rental property income is over £1,000.

Simplified expenses for self-employed landlords

Simplified expenses allow self-employed landlords to calculate certain allowable expenses using flat rates instead of tracking individual costs. This method makes it easier to manage finances while ensuring you claim all eligible deductions against your rental income.

Eligible landlords can use simplified expenses for costs like travel and staff wages, provided they do not operate as a limited company. Remember, these allowable expenses must be incurred solely to rent out properties.

Using simplified expenses checker can streamline your tax return process and help you maximise your allowable expenses, ultimately reducing your tax liability. Always keep accurate records to support your claims.

How to claim allowable expenses

Claiming allowable expenses as a landlord is essential for reducing your tax liability on rental income. To ensure you maximise your claims, follow these steps:

1. Keep accurate records: Maintain detailed records of all expenses related to your rental properties, including receipts and invoices. Save these documents for at least six years after filing your tax return.

2. Identify allowable expenses: Familiarise yourself with what qualifies as allowable expenses. Common categories include:

   • Property maintenance and repairs
   • Insurance costs (building, contents, and public liability)
   • Professional fees (accountants, solicitors)
   • Utilities and council tax (if paid by you)
   • Advertising and marketing costs

3. Complete your self assessment tax return: When it’s time to file your self assessment tax return, list your allowable expenses alongside your rental income. You do not need to submit receipts with your return, but keep them handy in case HMRC requests evidence.

4. Consult official resources: For more information on deadlines and specific claims, visit the GOV.UK website.

By following these steps, you can effectively claim allowable expenses for your rental properties, ultimately lowering your tax bill and enhancing your profitability as a landlord.

If you want more information about landlord allowable expenses or any other landlord financial advice, then contact our team on 03330 886 686 or e-mail us enquiry@dnsaccountants.co.uk.

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