What Costs Can Landlords Offset Against Tax?

Learn about the costs you can offset against tax to maximise your returns and ensure a successful property investment journey.

Are you making the most of tax-deductible costs? Whether you’re a private landlord managing a small or large portfolio, leveraging these deductions can substantially lower your tax burden.

From repairs and maintenance to landlord insurance, a variety of expenses can be reclaimed, provided you’ve maintained proper records, and that they’re incurred wholly and exclusively for the purpose of renting out the property.

Explore our comprehensive list below, detailing every eligible expense you can claim back, paving the way to greater profitability in your property investments.

1. Common costs you can’t claim
2. What expenses can landlords claim back when filing their tax returns?
3. What are the benefits of incorporating a limited company?

Common costs you can’t claim

Before delving into the allowable expenses for landlords, let’s first clarify what is not 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.

What expenses can landlords claim back when filing their tax returns?

The full range of rental property expenses is very diverse. To stay organised, ensure you keep all bills and paperwork related to your rental property activities.

This not only helps in your personal accounting but also provides readily available evidence should tax authorities require support for your claimed expenses.

Tax relief on mortgage interest

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 However, starting from April 2020, that benefit was rescinded.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.

Repairs and maintenance costs

Allowable expenses for landlords include fair repair and upkeep costs. This encompasses costs from fixing water leaks, addressing heating issues, and repairing broken windows.

Additionally, expenses for your annual gas safety certificate and service, along with your electrical condition report, are also considered allowable.

If you purchase these services through OpenRent, we’ll keep all your receipts for you, making it much easier to keep track of your expenses.

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Water rates, council tax, gas and electricity

Landlords can typically claim back water rates, council tax, and electricity as allowable expenses when calculating their taxable rental income in the UK.

These expenses are considered part of the costs associated with running and maintaining the property. However, it’s essential to ensure that these costs are directly related to the property being rented out, and they should be incurred wholly and exclusively for the purpose of renting out the property.

Insurance

Every landlord must insure their rental properties. You can claim back various types of insurance relevant to your property, such as landlord and contents insurance, which typically covers risks like damage to the building, liability, and loss of rental income.

Costs of services

Certain expenses related to services provided for the rental property are eligible to be claimed as allowable expenses for tax purposes. This includes the wages paid to individuals or companies providing services such as gardening or cleaning for your property.

You can include the wages paid to gardeners and cleaners as part of your allowable expenses when calculating your taxable rental income.

Travel expenses

You can claim a deduction for the costs of running a vehicle, but only the proportion of these costs that can be attributed to the business use related to your rental activities.

This may include expenses such as fuel, insurance, maintenance, and mileage rate deductions for business-related motoring costs.

Admin

Expenses such as phone bills for calls related to your rental property, stationery purchases for office needs, and the costs associated with advertising for new tenants can also be claimed for tax purposes.

You are eligible to claim these direct costs when calculating your taxable rental income, provided you maintain accurate records and receipts to support your claims.

Replacement furniture and white goods

The government now permits tax relief on costs for replacing items classified as ‘domestic.’ This includes replacement beds, carpets, sofas, fridges, and more.

This revised wear-and-tear tax relief policy is applicable only when an item is genuinely replaced and is no longer in use within the property.

You can only claim for a like-for-like replacement, meaning that the new item must be similar or identical in terms of function, type, quality, and price.

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 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 April 1, 2023, with the rate staying at 19% for companies with profits of up to £50,000.

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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