A Landlord’s Guide to Allowable Expenses and Income Tax
What does a landlord need to know about allowable expenses and income tax?
Landlords can reduce their income tax bills by claiming back certain expenses associated with letting out their properties.
However, not all expenses are allowable – i.e. accepted by the tax office – so it’s important to understand what you can and can’t claim for.
First things first, what is income tax?
Richard Cunningham, a chartered accountant and chartered tax adviser, says:
Very simply, this is tax that you pay on your earnings – on your profits.
You will need to pay tax on any and all the kinds of income you make, including:
- Self-employment income
- Employment income
- Rental profits
- Dividends on investments
Many landlords will also have day jobs for which they might be contracted as PAYE employees. But to pay tax on their rental income – unless operating as a limited company – they will also need to be registered as self-employed and complete a self-assessment tax return each year.
What are allowable expenses?
Allowable expenses are costs associated with running and maintaining your property. Allowable expenses can be deducted from your net income for the year, reducing the income tax you pay.
Allowable expenses include:
- Landlord Insurance
- Ground rent and service charges
- Maintenance and repair costs (though not costs associated with improvements)
- Purchases for use in your property – i.e. if you rent your property furnished
- Letting agent and property management fees
- Advertising for tenants
- Legal fees
- Accountant fees
- Mileage from property inspections/repairs etc
- Maintenance services such as cleaners or gardeners
- Office expenses associated with being a landlord
And if your tenants have an inclusive contract with you that covers things like council tax, gas and electricity, water or internet services, you can claim these costs as allowable expenses too.
Which expenses are not allowable?
You cannot claim costs involved with improving your property – i.e. improvements that aren’t essential – as allowable expenses. These are called capital expenses.
Richard Cunningham says that mistaking capital expenditure for allowable expenses is one of the most common mistakes he sees.
He says of the difference:
You’ve had a tenant, the tenant leaves and the house needs repainting. Or there’s a storm and some roof tiles blow away and you need to replace them – they’re both allowable.
However, it’s when you go ‘a bit further’ that you hit the boundaries of allowable expenses. Putting an extension on the property or installing a security system where there wasn’t one before – this is taking you into capital expenses territory and you won’t get a deduction on that for your income tax.
He adds that, it’s still important to keep a record of all that spending (capital and allowable) because ‘when you sell that property, those are all deductible in calculating your capital gains tax.’
What rate of income tax do I need to pay?
Your net profit – that is, all of your earnings for the year added together with all allowable expenses subtracted – will determine how much tax you pay.
- On net earnings of less £12,570 year you don’t have to pay any tax (this is called your personal allowance).
- Net income between £12,570 and £50,270 is taxed at 20%
- Net income between £50,270 and £150,000 is taxed at 40%
- Net income over £150,000 is taxed at 45%
However, your personal tax-free allowance (PA) also decreases if you make over a certain amount of income. Richard Cunningham explains that when you earn ‘£100,000 in taxable income, you start to lose your personal allowance. For every £2 over this figure, you will lose £1 of PA.’
It’s important that throughout the year you record all incomings and outgoings associated with your rental property, being clear on which are capital and allowable expenses.
That way, you’ll have everything you need at your fingertips when it comes time to calculate your income tax and submit a tax return. And when you come to sell your property, these receipts and documents will be helpful in calculating your capital gains tax too.
And, if you’re not sure the best way to store all this information, check out Mashroom’s free Income and Expense Tracker – it really will make your life so much easier!