What are the allowable expenses for landlords against rental income?

You may be struggling to wrap your brain around allowable expenses for landlords against the rental income that you earn per month, especially if you are new to being a landlord. Here, we’ll make sense of all of that by taking a look at rental income taxation and your allowable expenses as a landlord. 

What is rental income taxation?

But first, we should probably define rental income taxation and what this means for you. If you receive a monthly rental income from letting out your property, it is your responsibility to fill out a self-assessment tax return. This is a system HMRC uses to collect tax, which is your rental income taxation. 

To make the process easier for yourself, it’s a good idea to keep all of your statements as proof of income, so that you can keep track of the money you’re receiving on a monthly basis and so that you know how much tax to pay. This way, you won’t be left surprised or worried about how much tax will be coming out of your account. 

Things that count as rental income include: 

• Rent tenants pay you
• Rent received in advance
• Any payment made by you for services such as cleaning, utilities or maintenance 
• Non-refundable deposits or compensation received  for the early termination of a lease 

These are the things that you will need to pay tax on as a landlord and will have to be declared to HMRC. 

So, what are allowable expenses for landlords then? Luckily, there are certain things that you won’t need to pay tax on, which will help you save money on tax, known as allowable expenses. 

As a landlord, you are allowed to deduct certain expenses from your rental income to reduce your tax liability. It is worth mentioning, however, that these expenses are only allowed to be deducted if they are solely used for the purpose of renting out your property. 

Examples of allowable expenses include: 

• Property maintenance and repairs
• Letting agent fees
• Insurance premiums
• Interest on mortgages 
• Utility bills (if paid by the landlord)
• Costs of advertising the property to rent
• Legal and accounting fees
• Replacement of furnishings (for furnished properties)

We will go into these categories in more detail below. 

Revenue vs capital expenses

It is also important to know that there is a difference between revenue expenses and capital expenses. Essentially, these two expenses are two distinct categories of costs that need to be understood when managing the finances of your property and for tax purposes. These two expenses are treated differently when it comes to taxes. 

Revenue expenses

Revenue expenses include the daily running costs of renting out a house and are necessary to keep the property running and in a usable condition. Some examples of revenue expenses include repairs, utilities, property management fees, landlord insurance premiums, and any routine maintenance. 

As a landlord, you are entitled to claim back on all revenue expenses because they are necessary costs that cannot be avoided. They also lower the amount of tax that you will need to pay on your rental income. 

Capital expenses 

Capital expenses, on the other hand, are costs and expenses that are used to improve the property and are not necessary to maintain the smooth running of the property. These improvements will increase the overall value of the property and have a long-term benefit compared to revenue expenses. 

These expenses are added to the property’s value and may be subject to capital allowances or could also be considered when calculating capital gains tax (CGT) if the property is sold. 

So, as you can see, the main difference between the two expenses is their purpose. Revenue expenses are aimed at maintaining the property and capital expenses are aimed at improving the value of the property. So, it is crucial for you, as a landlord, to manage your tax liabilities properly otherwise you could be subject to fines from HMRC. 

Categories of allowable expenses

As we mentioned above, expenses must be incurred solely for the rental property and the maintenance thereof. Let’s now look at the different categories of allowable expenses for landlords. 

Property management costs

You’re probably more than aware of the costs involved with managing your property. It is a major investment and with property ownership comes a lot of responsibility and money. Property management costs include the following: 

Letting agent fees

Letting agent fees are fees that you would pay to a letting agent that cover duties such as managing the process of finding new tenants for your property, conducting background checks, drawing up tenancy agreements, and advertising your property for rent. 

Property management company fees

If you wanted to, you could also pay a letting agent a fee to make sure that your property is maintained. They will oversee the day-to-day operations of your property, like collecting rent, handling tenant complaints, dealing with legal issues and arranging maintenance. 

Marketing costs

Marketing costs would include expenses associated with promoting your property to attract tenants to live there. These expenses could include hiring a photographer to take pictures of your property or online listings. 

Tenant vetting and referencing

As you may know, you will need to conduct tenant referencing when looking to find new tenants for your property. This will include expenses associated with credit checks, referencing fees and conducting background checks to make sure these tenants are reliable and trustworthy. 

Legal and administrative fees

Whenever you need to draft tenancy agreements or handle disputes, there are often costs involved with this. For example, you may need to fork out money for an eviction process or to seek legal advice for any landlord-tenant disputes. 

Inspection fees

There will also be costs associated with hiring a letting agent to conduct regular inspections. Inspections need to be carried out to ensure your property is being maintained. This can be done by a property manager or an independent company. 

Service charges for leasehold properties

If you own a flat in a block of flats, you will need to pay a service charge to cover the maintenance of communal areas, cleaning and any building maintenance. 

Maintenance and repairs

You may also need to plan for any fees that go towards maintenance, especially when hiring a property manager who would organise and supervise any repairs or routine maintenance. 

Non-allowable expenses

So, what are non-allowable expenses then?

Non-allowable expenses are expenses that can’t be deducted from your rental income when calculating your tax liability. Here are some examples: 

Capital improvements

Capital improvements include any work done to the property with the purpose of improving it, rather than maintaining it. Examples of improvements made to a property include extensions, installing a new kitchen or converting a loft. 

These expenses can only be deducted for capital gains tax (CGT) purposes if the property is sold. 

Personal expenses

If, for example, you live in the rental property part-time and use some of the property for personal use, any costs associated with that personal use cannot be classed as allowable expenses for landlords. 

Mortgage capital repayments 

Mortgage interest may partially be deductible under tax rules, however, the actual repayment of the mortgage is not. Mortgage capital repayments are considered a personal financial obligation rather than a business expense. 

Costs of property purchase or sale

Unfortunately, any legal and professional fees related to the sale or purchasing of a property are considered capital expenses. These fees would include surveyor fees, conveyancing fees and estate agent commissions. 

You could, however, use these fees for CGT if you sell the property at a later stage, so make sure that you keep proof of all payments made. 

Initial renovations or repairs

If, for example, you purchase a property that is dilapidated and not suitable to live in, any costs involved with repairing the property to make it habitable cannot be included as allowable expenses for landlords. 

Salary payments

If you pay yourself a salary or draw any money from the rental income for any personal use, then you will not be able to claim these as allowable expenses. This includes any payments made to family members that are not for business purposes. 

Fines

Any fines or penalties cannot be claimed as allowable expenses either. 

Depreciation

The general depreciation of a property cannot be claimed as an allowable expense. This is the same in many tax systems around the world, too. Some assets, however, such as furnished rental properties may qualify for certain allowances, but this would need to be clarified beforehand. 

Entertainment 

Any costs associated with entertaining tenants, including gifts or hospitality, are not considered allowable expenses for landlords. 

Common mistakes landlords make

There are a few common mistakes made when it comes to the costs of renting out a house and understanding allowable expenses for landlords, such as: 

• Confusing capital and revenue expenses: ensure that you know the difference between these two categories of expenses so that when you keep track of all of your expenses, you know which category to put certain expenses under. 
• Forgetting to claim small allowable expenses: these include stationary and office supplies, postage and delivery costs, travel expenses or subscriptions and membership fees

• Lack of proper record-keeping:  there is a lot to keep on top of when renting out a property, so keeping records of all your expenses from the start will make your dealings with HMRC a lot easier when the time comes. 

Don’t forget that you can also claim any landlord insurance add-ons as allowable expenses for landlords. If you are on the lookout for the best landlord insurance deals, make sure to get in contact with our team of experts at CIA Landlords on 01788 818 670.