What are the tax deductible expenses against rental income ?

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What are the tax deductible expenses against rental income ?

By RentiD Admin

What are the allowable tax deductible expenses against rental income in 2021?

This is a commonly asked question on landlord forums which we will summarise here for landlords of residential property.

There are separate rules for commercial property and furnished holiday lets. Plus there will be other considerations for large portfolio landlords operating limited companies with staff not covered here.

The basic advice is available from the Government website here.

However, the area can be quite confusing even for seasoned landlords so we recommend you seek professional advice from an accountant well versed in the area to avoid the potential costs, hassle and risk of getting it wrong and falling foul of HMRC.

So what are the allowable tax deductible expenses against rental income?

 

Capital expense versus revenue expense

You or your company must pay tax on the profit you make from renting out the property, after deductions for ‘allowable expenses’.

Some landlords believe that if you have spent money on your rental property, you can in all cases offset it against your rental income.

However, this is not the case.

Allowable expenses are things you need to spend money on in the day-to-day running of the property.  Also referred to as revenue expense, these costs are tax deductible.

Capital expenses such as the all costs relating to the purchase of a property (including purchase price, Stamp Duty, legal fees, surveyor fees and any auctioneers costs) are not tax deductible – even if costs are incurred and the purchase does not go ahead.

However, these can be deducted from the gain (or added to the loss) when you sell the property. You should keep a record of all the costs together with the supporting receipts so that you can claim Capital Gains Tax relief for the expenditure when you sell.

 

Legal, safety and compliance, management and accountancy fees

The following expenses are tax deductible:

  • Legal fees for lets of a year or less, or for renewing a lease for less than 50 years
  • Legal fees for evicting tenants
  • The cost of providing your tenants with an EPC, gas safety inspection, electrical safety checks and legionella testing
  • The licence fee for Houses of Multiple Occupation (HMO)
  • Letting agent fees for advertising/tenant finding such as RentiD Tenant Find including the cost of photos, floor plans, 3D virtual tours, tenant referencing and inventory with check-ins
  • Letting agent fees for management
  • The cost of property management software such as RentiD Manage Plus
  • The premium for landlord’s buildings and contents insurance
  • Services paid for by you – usually communal area services changes for cleaning, gardening and electricity (with flats) but also media services (including television licence) and telephone (more likely with short-term holiday lets)
  • Fees from your accountant
  • Reasonable travelling expenses
  • Postage, stationery and telephone calls

The following expenses are not tax deductible:

  • Legal fees in connection with the purchase of the property
  • Life assurance premiums
  • If you bought a suit to show round potential tenants!

 

Repair and maintenance

These are tax deductible expenses so long as they are not classed as a capital improvement.

Re-decorating a property prior to letting it (including in-between tenancies) to remedy ‘wear and tear’ is not considered a capital improvement and is therefore tax deductible.

However building an extension would be, as would buying property in poor condition and then carrying out substantial renovation work.

In addition, if you lived in the property and carried out work prior to renting it out – this is classed as maintenance of the property as a result of private use, not rental purposes, so cannot be claimed.

 

Replacement of domestic items relief

Where a residential property is not a Furnished Holiday let or no Rent a Room relief is claimed, the expenditure on replacing items of furniture and white goods will be allowed as an expense less any proceeds on the disposal of the item being replaced.

The cost of assets which are not replacements is not allowed as an expense.

 

Ground rent, council tax and utilities

The following expenses are tax deductible:

  • Ground rent and service charges (if the property is a flat) – not normally paid for by the tenant
  • Council tax if paid for by you (usually during void periods)
  • Gas, water and electricity bills if paid for by you

 

Finance costs

The following expenses are tax deductible:

  • The interest element of your buy-to-let mortgage – but not the repayment element
  • For furnished holiday lets and residential properties owned by limited liability companies, the permissible finance costs are allowed in full
  • For other residential properties owned by individuals or partnerships, from 6th April 2020, the finance costs are restricted and only 20% of the finance costs can be claimed against the tax liability on the net rental income after deducting all other expenses and losses brought forward but before any finance costs

 

In conclusion – what are the allowable tax deductible expenses against rental income in 2021?

As a general rule of thumb, allowable expenses are the things you need to spend money on in the day-to-day running of the property. These can be offset against your rental income.

What isn’t permissible are capital costs including all the costs relating to the purchase and major improvement or renovation of your rental property.

The cost of RentiD Manage and Tenant Find are both tax deductible against your rental income. RentiD is the property management app backed-up with letting agency services on demand. For more information on how we can help you save time, money, hassle and risk click here.

If you’re a self-managing residential landlord in the UK why not join our new Facebook group Self-Managing UK Landlord Support here.

 

DISCLAIMER

The above article is provided for guidance only and may not cover your personal circumstances so you should not rely on them. It is important that you seek appropriate professional advice which takes into account your personal circumstances.

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