A Guide to Tax Deductible Costs for Your Landlord Tax Return

Are you making the most of tax-deductible expenses when filling out your landlord tax return? Whether you own one property or several, claiming these deductions can help lower your tax bill.

You can claim a variety of expenses, including repairs, maintenance, and landlord insurance, as long as you’ve kept good records and the costs are directly related to renting out your property.

Take a look at our detailed guide to find out all the eligible expenses you can claim. This could help improve the profitability of your property investments.

1. Common costs you can’t claim
2. Do landlords pay tax on rent?
3. Is mortgage interest tax deductible?
4. Allowable expenses for landlords
5. What are the benefits of incorporating a limited company?

Do landlords pay tax on rent?

Rent and some other payments you receive from tenants count as income, and if it exceeds certain thresholds, you must pay tax on it.

The first £1,000 of your income from property rental is tax-free. This is called your ‘property allowance’.

You must report your rental income on a Self Assessment tax return if it’s more than £2,500 after allowable expenses or more than £10,000 before allowable expenses. The deadline for submitting your Self Assessment is 31st January.

Rental profits are taxed at the same rates as other income, such as wages or business earnings. The rates are 0%, 20%, 40%, or 45%, depending on your tax band.

Your rental earnings are added to your other sources of income, which could push you into a higher tax bracket.

For example, if you earn £40,000 from your job and make £15,000 in rental profit, your total income would be £55,000. This amount would exceed the higher-rate tax threshold (£50,271), so you would pay 40% tax on the £4,729 that goes above this limit.

Common costs you can’t claim

Before delving into the allowable expenses for landlords, let’s first clarify what isn’t eligible for claims.

The costs incurred when you buy a property are considered integral to the purchase price and cannot be offset against future rental income.

This includes expenses such as stamp duty, legal fees, surveys, and auctioneer costs.

Instead, these expenses should be factored into future capital gains liabilities, particularly if you decide to sell the property.

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You might also be interested in…

• A Guide to Tax Deductible Costs for Your Landlord Tax Return
• When Will Section 21 Evictions Be Scrapped?
• How to Serve a Section 21 Notice to Tenants
• What’s a Good ROI for a Buy to Let Property in the UK?
• Tenant Fees Act 2019: A Guide for Landlords

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Is mortgage interest tax deductible?

One of the most significant changes for buy-to-let landlords in recent years was the government’s decision to phase out mortgage interest tax relief.

Before 2017, all mortgage interest payments were fully deductible against taxes. However, starting from April 2020, that benefit was rescinded.

In its place, landlords now receive a tax credit equivalent to 20% of their annual mortgage interest payments.

While the introduction of the tax credit is appreciated, it doesn’t match the generosity of the previous scheme.

Allowable expenses for landlords

Rental property expenses can cover a lot of different things. To keep everything in order, it’s a good idea to hang on to all your bills and paperwork related to your property.

This not only helps you keep your accounts in order but also makes it easier to provide proof if the tax authorities ask for details about your expenses.

Repairs and maintenance costs

As a landlord, you can claim allowable expenses for things like repairs and maintenance. This includes costs for fixing leaks, sorting out heating problems, and repairing windows.

You can also claim expenses for your annual gas safety certificate and service, as well as your electrical condition report.

If you book these services through OpenRent, we’ll keep all your receipts stored directly on your account, making it much easier to stay on top of your expenses.

Water rates, council tax, gas and electricity

When you include bills like water rates, council tax, gas, and electricity as part of the rent, you can claim these costs as allowable expenses.

In this case, you’re effectively covering the bills for your tenant, but since you’re paying them to keep the property running, you can deduct these costs from your taxable rental income.

The key is that the costs must be directly related to the property you’re renting out, and they should only be used for that purpose.

So, if you’re paying these bills as part of the rent agreement, they count as part of the running costs of your rental property.

Insurance

As a landlord, insuring your rental property is a must. Not only does it protect you financially, but it also gives you peace of mind knowing you’re covered for things like accidental damage, tenant disputes, or unexpected events.

You can claim back various types of insurance, such as landlord and contents insurance, which typically cover damage to the property, liability issues, and even lost rental income if the property becomes uninhabitable.

Costs of services

You can also claim back certain expenses related to services you provide for your rental property. This includes things like wages for gardeners or cleaners who help maintain the property.

Travel expenses

You can claim back some of the costs of running a vehicle, but only the part that’s related to your rental business.

This can include expenses like fuel, insurance, maintenance, and mileage rates for trips you make for business purposes, such as visiting your rental properties. Just make sure to keep records of how much you use your vehicle for your rental activities so you can claim the right amount.

Admin

You can also claim expenses like phone bills for calls related to your rental property, stationery for office use, and costs for advertising to find new tenants.

Again, these costs can be deducted when calculating your taxable rental income, as long as you keep accurate records and receipts to back up your claims.

Replacement furniture and white goods

You’re also allowed tax relief on costs for replacing items considered ‘domestic,’ such as beds, carpets, sofas, fridges, and more.

This wear-and-tear tax relief only applies when an item is actually replaced and is no longer being used in the property.

You can only claim for a like-for-like replacement, meaning the new item should be similar or identical in terms of function, type, quality, and price to the one it’s replacing.

What are the benefits of incorporating a limited company?

Investing through a limited company has several perks that can benefit landlords.

Firstly, when it comes to financing costs like mortgage payments, these are seen as business expenses for tax purposes. This means you can deduct them from your taxable profits, resulting in a lower tax bill compared to individual landlords who pay income tax.

The small profits rate of corporation tax (19%) is lower than the basic rate of income tax (20%). However, it has been 25% for companies with profits over £250,000 from 1st April 2023.

Moreover, when it comes to dividends (the money you get from your company’s profits), they’re generally taxed more favourably than personal income.

If you sell a property and make a profit, the tax you pay on it is called corporation tax, which is often simpler to deal with than capital gains tax, as companies aren’t subject to the obligations relating to residential property gains.

Limited companies are also advantageous for joint ventures, allowing you to set out clear agreements with others.

Finally, having a limited company gives you limited liability, which means your personal assets are protected from the company’s debts. Just keep in mind that some financial arrangements may require personal guarantees.

The challenge for you is to work out whether this is all worth it. For landlords with a large number of properties, enjoying higher rental incomes and benefiting from more tax-efficient dividends will likely make sense. The advantages will outweigh the extra cost involved in setting up and maintaining a limited company.

If you have only one or two rentals, however, with no plans to expand your portfolio, then working out your tax liability and paying HMRC via an annual self-assessment will remain your preferred choice.

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