The rules for what are allowable expenses for landlords have changed in recent years and a lot depends on your personal circumstances – and whatever they are you will need to complete a self-assessment tax return.
This means seeking professional tax advice may be a good idea, but here we look at what landlords should know about the valid expenses they can claim.
Whether you are an ‘accidental landlord’ – this is a term to describe someone who is renting out a property they may have tried selling previously – or you may be heading overseas for work and renting your home out to generate an income, then renting out a property is a business undertaking and there will be a tax bill to pay.
One of the big issues for a landlord is that their rental income may push them into the higher rate tax band, so they will move from the basic rate tax of 20% and instead pay 40% to HMRC.
Different types of tax for a landlord
So, the different types of tax for a landlord include:
- Income tax
- National Insurance Contributions (NICs)
- Capital gains tax
- Stamp duty.
You need to appreciate that capital gains and stamp duty will only need to be paid when you are selling or buying a property.
However, income tax and National Insurance Contributions are paid annually and will be based on the income you are making from renting out property.
The other issue for those landlords who have created a limited company for letting out their property is that you will also need to register for corporation tax.
Register for self-assessment
It’s important that the first thing you do as a landlord is to register with HMRC for self-assessment purposes.
When you are registered, you can file a tax return and you can do this either online or by filling in a paper form.
The self-assessment deadline for submitting a tax return is usually 31st of October for paper forms and 31st of January for online tax returns. Once the return has been filed, you’ll need to pay the tax that is owed.
What are allowable expenses for rental property?
This then brings us to the question of what are allowable expenses for rental property?
As mentioned, there have been changes in recent years affecting all landlords, but there are expenses that a landlord is entitled to deduct from their tax bill. The main ones are:
- Replacement of domestic items
- Property and maintenance repair costs
- Insurance fees
- Accountancy fees
- Running costs.
It’s also possible to claim for:
- Letting agent fees
- Service charges
- Cleaning costs
- Light and heating costs
- Advertising costs
- Ground rent.
The advice on the Gov.uk website states that if a definite part of a cost is an “expense incurred wholly and exclusively for the property business, you can deduct that part.”
Essentially, this means that any expense you incur in the running of a rental property can be claimed against your tax bill – and you may find that accounting software designed for landlords will be of great help here.
The rules do change, for example, landlords could claim a 10% wear and tear allowance every year, but this has been replaced by domestic items relief.
So, if you replace items such as curtains or beds, and this must be on a like-for-like basis, then you can claim for these and for the cost of disposing of the old items.
You cannot claim for capital expenses such as making improvements to the property or having an extension built though there may be ways to utilise some of these expenses against your capital gains tax bill should you decide to sell the property.
Is a mortgage an allowable expense for rental income?
The big change for landlords in recent years has been the reduction of tax relief that you can claim against your mortgage interest payment.
In April 2017, the process to taper out this tax relief began and it is also applicable to interest being paid on loans and overdrafts and also for the incidental costs and fees that come when you repay mortgages and loans.
The tapering out of this relief will see, in the 2019/2020 tax year, 25% of finance costs from the landlord’s rental income being available as tax relief.
From 2020/2021, this relief will go completely.
Instead, there is a 25% tax credit available though this is not as beneficial for high rate and additional rate taxpayers.
Are legal fees tax deductible for investment property?
The legal fees that you may rack up while buying an investment property may include the solicitor, a surveyor and estate agent fees and these are not tax-deductible.
That’s because they are seen as capital costs, whereas professional fees, such as those from an accountant, are tax deductible for an investment property.
However, you can claim the legal fees for a property being let for less than one year – and when renewing a property lease that is less than 50 years.
What expenses can you claim for rental property?
The expenses that you can claim for rental property will cover the following which we haven’t mentioned yet and they are:
Council tax and utility bills: All landlords will have to endure void periods, that’s when there is no tenant in the property paying rent, but you will still need to pay the council tax and utility bills such as the water, gas,
You can claim these against your tax bill.
Other expenses a landlord can claim will be the ground rent and service charges for common areas and it is advisable to have specialist landlord insurance – having normal household insurance will not be adequate – and also have public liability cover. The insurance can be claimed against tax.
You can also claim the cost of gardeners and for a cleaner.
Finally, as we’ve mentioned, the rules governing the allowable expenses for landlords do change on a regular basis, so it’s worthwhile joining a professional organisation or monitoring property investment sites, including Property Road, to ensure that any changes to the rules will not come as a surprise.