Allowable Expenses for Rental Income

When you rent out a property in the UK, the income you receive is subject to tax. However, landlords can reduce their taxable rental income by deducting certain expenses that are incurred wholly and exclusively for the purpose of renting out the property. Understanding what expenses are allowable is crucial for landlords to ensure they are paying the correct amount of tax and not missing out on potential savings. This article provides a comprehensive guide to allowable expenses for rental income in the UK.

What Are Allowable Expenses?

Allowable expenses are costs that a landlord can deduct from their rental income to reduce the amount of profit that is subject to tax. These expenses must be incurred wholly and exclusively for the purpose of renting out the property. This means that the expense must be necessary and directly related to the rental business.

Common Allowable Expenses

Below are some of the most common allowable expenses that landlords can deduct from their rental income:

1. Mortgage Interest:

   • Prior to April 2020, landlords could deduct the full amount of mortgage interest from their rental income. However, under the new rules, you can now only claim a tax credit based on 20% of your mortgage interest payments. This tax credit applies to basic rate taxpayers, while higher-rate taxpayers no longer benefit from full relief.

2. Property Repairs and Maintenance:

   • Costs associated with repairing and maintaining the property are generally allowable. This includes fixing a broken window, repairing a boiler, or repainting a room. However, improvements that increase the value of the property, such as an extension, are not allowable as these are considered capital expenses.

3. Insurance:

   • Premiums paid for landlord insurance, which typically covers buildings, contents, and public liability, are allowable expenses. This also includes any specialist insurance such as rent guarantee insurance.

4. Utility Bills:

   • If you, as the landlord, pay for gas, electricity, water, or other utilities on behalf of your tenants, these costs can be deducted from your rental income.

5. Council Tax:

   • If you pay the council tax for the rental property, rather than the tenant, this cost is also an allowable expense.

6. Letting Agent Fees:

   • Fees paid to letting agents for managing the property, finding tenants, and collecting rent are deductible. This also includes legal fees for letting agreements and for the cost of evicting a tenant.

7. Ground Rent and Service Charges:

   • If your property is leasehold, the ground rent and service charges you pay to the freeholder are allowable expenses.

8. Advertising Costs:

   • Costs associated with advertising the property to find new tenants, whether online, in newspapers, or through estate agents, are deductible.

9. Accountancy Fees:

   • Fees paid to an accountant for preparing and filing your rental accounts and tax returns can be deducted from your rental income.

10. Travel Expenses:

    • If you travel to the rental property for inspections, repairs, or to meet tenants, you can claim for travel expenses. This can include mileage for using your car (using the approved mileage rate), or public transport costs.

11. Legal Fees:

    • Legal fees for letting agreements or for obtaining a rent payment order from a tenant are allowable. However, legal fees for acquiring the property or for large-scale improvements are considered capital expenses and are not deductible.

12. Replacement of Domestic Items Relief:

    • If you replace furnishings, appliances, or kitchenware in a rental property, you can claim this cost against your rental income under the Replacement of Domestic Items Relief. This covers items such as sofas, beds, fridges, and carpets but does not cover initial purchases of these items for a property.

13. Office Costs:

    • If you run your rental business from home, you can claim a proportion of your home office costs, such as stationery, phone bills, and a percentage of your utility bills, as an allowable expense.

Capital Expenses vs. Revenue Expenses

It’s important to distinguish between capital expenses and revenue expenses. Capital expenses relate to improvements or alterations to the property that add value, such as building an extension or installing a new kitchen. These cannot be deducted from your rental income as allowable expenses but may be claimed as part of Capital Gains Tax relief when you sell the property.

Revenue expenses, on the other hand, relate to the day-to-day running and maintenance of the property and are deductible from rental income.

How to Claim Allowable Expenses

When it comes to claiming allowable expenses, landlords must keep accurate records of all expenses incurred. Receipts, invoices, and bank statements should be kept as proof of expenditure. You will need these records when filling out your Self Assessment tax return, where you can list all allowable expenses against your rental income.

Keeping Records

Landlords are required by HM Revenue and Customs (HMRC) to keep detailed records of all income and expenditure related to their rental property. These records must be kept for at least five years after the 31 January submission deadline of the relevant tax year.

What Happens If You Fail to Declare Income or Expenses?

Failing to declare all your rental income, or wrongly claiming expenses that are not allowable, can lead to penalties from HMRC. It is important to ensure that all figures are accurate and that you are only claiming for legitimate expenses.

Conclusion

Understanding and correctly claiming allowable expenses is vital for landlords to ensure they are not overpaying tax on their rental income. By keeping accurate records and knowing what expenses can be deducted, you can significantly reduce your taxable rental income. It is always advisable to consult with a tax professional or accountant to ensure you are making the most of your allowances and complying with HMRC regulations.

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