New Landlords – ‘Expenses & Allowances’ You Can Claim
You can reduce your tax bill by deducting expenses you incur when renting out your property.
In this article
- Which allowable expenses you can claim
- How an allowable expense affects your tax liability
- Wear and tear allowance
- Domestic items relief and how it works
Allowable expenses a landlord can claim
Landlords can claim the expenses of running and maintaining their rental property, which in turn can reduce their tax bill.
Examples of allowable expenses you can claim are:
- Landlord insurance
- Letting agency fees
- Legal fees
- Accountancy fees
- Any direct costs such as phone calls and stationery
All expenses should be exclusively spent as a result of renting out your property. You can deduct all or part of your expenses from your tax bill.
You can also claim some of the interest on buy-to-let mortgages. Since 2020, you’ve no longer been able to deduct any of your mortgage expenses from your rental income to reduce your tax bill. Instead, you now receive a tax-credit, based on 20% of your mortgage interest payments.
An allowable expense and how it affects your tax bill
Expenses are costs that you can deduct from your income when calculating your overall profit on a self-assessment tax return.
Tax you’re charged is based on your profit, rather than your overall income, reducing the profit you’ve made over the tax year, this means the tax you’ll owe will also be reduced.
Most landlords will file their tax return under the cash basis (this is automatic for those who earn less than £150,000 – but it is possible to opt out). This means your tax return should only include income that’s been received during the tax year, and expenses that have been spent during that time. If you file using the accrual basis, this would include revenue and expenses.
Annual investment allowance for landlords
As a landlord, you cannot deduct expenses of a capital nature from the rental income you earn. That means, you can’t deduct the cost of renovating a home that’s in a state of disrepair.
You may, however, be able to use the cost of these investments to reduce your capital gains tax bill when you come to sell your rental property.
Landlord ‘wear and tear’ allowance changes
If the property you let out is fully furnished, you used to be able to claim for wear and tear of furnishings, such as cookers, carpets, beds and televisions. The wear and tear allowance allowed you to claim a maximum of 10% of the net annual rent (income less expenses) each year. However, this has now changed. The government now allows you to claim tax relief on anything you spend on replacing what it labels as a ‘domestic item’.
Crucially, this only applies to items you are replacing. You can’t claim tax relief on the actual cost of kitting out a property for the first time with furniture or appliances. It can only apply when an item is genuinely replaced and no longer used in the property.
The ‘replacement of domestic items relief’
The government lists some examples of what domestic items qualify for this new relief. These include replacement of furnishings such as carpets, curtains, sofas and electrical appliances.
You can only claim for a like-for-like replacement. If, for example, you bought a new fridge worth £700, but the cost of replacing your old fridge with a similar one was only £450, you’d only be able to claim £450 relief.
You can also claim for the cost of disposing items such as electrical goods.
How does the ‘domestic items relief’ work?
You can deduct the cost of replacing domestic items from your rental income tax when calculating your net profit for the year, on which you pay tax.
So, say you replace a number of items in your property, ready for new tenants moving in. These include blinds for £400, a washing machine for £650, disposal of the old washing machine, and a new bed for £500.
The total relief you can claim for is £400 + £650 + £60 + £500, which amounts to £1610.
This can be deducted from your annual rental income to work out your tax bill at the end of the tax year.
Tax Free Allowance
Landlords are eligible for a property tax allowance of £1,000.
If your taxable income from property is less than £1,000, you do not need to declare it to HMRC or pay any tax on it.
If your rental income exceeds £1,000, you can choose to deduct your property allowance from your rental income rather than deducting your actual allowable expenses.
The best option will depend on the amount of costs you have incurred. If you claim your property allowance, you cannot also claim a deduction for your expenses.