Allowable Expenses for Landlords are crucial because they reduce tax bills and save you money. Recent rule changes in 2018 mean landlords are now facing higher tax bills than ever.
So now is the time to make sure you understand all the allowable expenses you can claim as a landlord.
What Are Allowable Expenses for Landlords
Allowable expenses for Landlords are costs that are deductible from rental income. These expenses must be wholly and exclusively for renting out your property.
A landlord cannot claim for costs of their own home against a rental property profits. That being said HMRC sets out some circumstances where landlords can claim for some of their private expenses like use of home and mileage.
Generally speaking most of the money a landlord spends to keep their rental property in good order is an allowable expense.
But some recent changes to the tax system means some expenses may now be restricted or now disallowed.
How to Avoid Paying Tax as a Landlord
The easiest way to avoid paying tax as a landlord is by making sure you claim for every single allowable expense you are entitled to.
You also should make sure that you keep every receipt to support your expenses with details of the property. This is your evidence that you have a legitimate expense to claim against your taxes.
Here are some of the typical allowable expenses for landlords:
Maintenance and Repairs
Landlords are able to deduct most of the money they spend keeping a rental property in good order. Typical allowable expenses are:
- repairing water or gas leaks, burst pipes;
- repairing electrical faults;
- replacing broken windows, doors, gutters, roof slates/tiles;
- repairing internal and external walls, roofs, floors;
- repainting and redecorating (but not improving) the property to restore it to its original condition;
- treating damp or rot;
- re-pointing, stone cleaning;
- hiring equipment to carry out necessary repair work;
- replacing existing fixtures and fittings, such as radiators, boilers, water tanks, bathroom suites, and kitchens, but not electrical or gas appliances;
- Service charges
A landlord cannot claim for costs which are Capital Expenses. A capital expense is something that improves a property rather than maintains.
An example of a capital expense for a landlord is an extension or a significantly upgraded kitchen.
Capital expenses are taxed differently using capital gains tax rules.
Costs of Replacing Furniture & Furnishings
Any costs for replacing furniture and fittings provided for tenants are an allowable cost for landlords. Here are some examples:
• Dining furniture
• Soft furnishings
• Kitchen appliances
Landlords previously used an allowance called Wear and Tear Allowance to cover the costs of replacing furnishings.
Wear and Tear Allowance has now been abolished and landlords must these costs claim on an actual basis.
Buildings and contents insurance are allowable expenses for landlords tax.
Until 5 April 2017, mortgage interest was an allowable expense for landlords in full. But from 6 April 2017, this interest relief is set to be removed meaning landlords can only claim a percentage. The percentage landlords can claim will be phased out on a sliding scale until 2020 when mortgage relief stops being an allowable expense for landlords.
How much Mortgage Interest is allowable?
Landlords can find the interest element of mortgage payments made on their mortgage statement. The landlord then needs to multiply the mortgage interest by the amount allowable, depending on the tax year to work out how much is allowable for tax.
This is how mortgage interest relief will be phased out from now until 2020:
|Tax Year||% Allowable|
|2020/2021 and beyond||0%|
When working out the amount of mortgage interest that is an allowable expense you can only include interest on the initial loan you take to buy your rental property, not any additional amount you may incur on any re-mortgage you take out.
Landlord Tax Reduction
Mortgage interest relief is to be replaced by a new relief called the Landlord Tax Reduction, which is being phased in on a similar timescale to the above. From 2020 mortgage interest will no longer be an allowable expense for landlords.
Instead landlords will be able to reduce their FINAL tax bill by the lowest of the following three calculations:
- Mortgage interest multiplied by basic rate of tax (currently 20%) plus any unused mortgage interest brought forward;
- Rental property profits multiplied by basic rate of tax (currently 20%) after deducting any brought forward losses.;
- Total income multiplied by basic rate of tax (currently 20%), after all other losses and reliefs but excluding savings and dividends income that exceeds the personal allowance
This is how the Landlord Tax Reduction is being phased in:
|Tax Year||% Allowable|
|2020/2021 and beyond||100%|
Until 2020 landlords must use a combination of the traditional mortgage relief method and the landlord tax reduction, tapered for the percentage allowable.
Any costs paid for letting and managing a rental property are allowable expenses for landlords tax purposes.
Equally is a landlord chooses to advertise their own property for rent then these costs would be allowable.
Landlords can claim for the cost of an accountant preparing rental accounts.
If a Landlords finds themselves need to pay legal or professional fees relating to the day to day running of a rental property for example for debt collection reasons then these are tax allowable.
The legal fees in relation to the sale/purchase of a property are not allowable.
Instead, these costs will be tax allowable on sale of the property when working out capital gains tax.
It’s worth noting that legal fees for renewing a lease for less than 50 years is an allowable expense for landlords.
Any ground rents on leasehold properties are allowable expenses for landlords.
Water rates, council tax, gas and electricity
In the event that a landlord pays for any costs such as these as part of a tenancy agreement then they will be tax allowable.
Unpaid rents are a bad debt which is an allowable expense for landlords. The rent must remain unpaid for 6 months and the landlords should have taken appropriate steps to chase up the unpaid rent. If the rent still remains unpaid then the landlord can deduct this against from rental income, along with any eviction costs.
Use of Home
Landlords who work from home managing properties can claim an amount to cover the cost of electricity, space etc. The simplest way to do this is to claim a fixed amount set by HMRC. Alternatively a landlord can use an actual method of claiming for use of home.
Find out more about calculating your use of home here.
Travel costs getting to and from a rental property to check on it or visiting agents are an allowable expense, provided HMRC rules are followed. Under new regulations landlords can now claim mileage for car journeys using a Landlords Mileage Claim.
Part Expenses for Landlords
If a landlord finds themselves in a situation where they buy something and only part relates to a rental property then HMRC set out rules on how to handle part expenses.
Claiming Part Expenses
Sometimes you may need to pay for something where only part of it relates to your rental property. HMRC sets out rules on how to handle claiming for part expenses.
The rule set out by HMRC is that a landlord can claim for part expenses against their taxes is:
Where a definite part or proportion of an expense is incurred wholly and exclusively for the purposes of the property business, you can deduct that part or proportion.
This means that there needs to be a clear way to define which part of the expense relates to your rental property.
Example of Claiming Part Expenses
You need to replace kitchen tiles in your rental property and buy 12 meters square of tiles for £240.
On fitting you realise that you only needed 10 meters square and decide to use the left over tiles in your own house rather than return them.
Therefore, although the entire bill for tiles is not wholly and exclusively for your rental property we can clearly define which portion relates to your rental property. Therefore 10 meters square of the price can be treated as an allowable expense of £200 (10/12 x £240).
Example of Claiming Part Expenses
You buy a new hoover for your own home and also use it to clean your rental property on change over of tenants. There is no clear way to define which part of the hoover cost relates to your rental property so the cost will not be an allowable expense.