Landlords incur various expenses when letting out a property. These may be directly related to the property itself, such as repairs and maintenance, or in relation to finding tenants and managing the let. To ensure that tax is not paid unnecessarily, it is important that the landlord claims relief for all allowable expenses.
The general rule is that a deduction is allowed for revenue expenses that are incurred wholly and exclusively for the purposes of the property rental business. Relief for capital expenditure depends on whether the cash basis or the accruals basis is used. Under the default cash basis, capital expenditure can be deducted unless a deduction is specifically prohibited, as is the case for land, property and cars.
Although the exact expenses will vary from let to let, the following is a list of common expenses which a landlord may incur and which may be deducted in computing profits as long as the wholly and exclusively rule is met:
- general maintenance and repairs to the property (but not improvements);
- water rates;
- council tax;
- gas and electricity;
- insurance (such as landlord’s insurance for buildings and landlord’s contents);
- cleaning costs;
- gardening costs;
- letting agents’ fees;
- property management fees;
- legal fees for lets of less than a year or for renewing a lease of less than 50 years’
- accountant’s fees;
- office costs, such as stationery, paper, printing and postage;
- advertising costs;
- phone calls; and
- rent where the property is sub-let.
Relief is not available if the tenant incurs the expense rather than the landlord (as may be the case with council tax and utilities, for example).
Where the landlord uses his or her own car for the purposes of the property rental business, a deduction can be claimed on a mileage basis using the simplified expenses system. The rate for cars and goods vehicles is 45p per mile for the first 10,000 business miles in the tax year and 25p per mile thereafter.
Interest and Other Finance Costs
Relief can be claimed for interest costs where the property was funded with borrowings, but not for any capital repayments on the mortgage. Interest costs are allowable on borrowings up to the cost of the property when first let. The mortgage does not need to be secured on the let property.
For 2020/21 relief for interest and associated finance costs is given fully as a tax reduction at the basic rate. For 2019/20, 25% of the costs were deductible in computing profits, with relief for the remaining 75% being given as a tax reduction at the basic rate.
To ensure that deductions for expenses are not overlooked, the landlord should keep a record of all expenses incurred in relation to the let, together with receipts and invoices. Failing to claim allowable deductions means that tax will be paid unnecessarily.