A Guide About the Allowable Expenses Against Rental Income
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If you are involved in a property rental business, one of the areas to be fully aware of is how much allowable expenses can be deducted against your rental income. Understanding these deductions, for the residential property you already own or plan to acquire, can help you make smart choices and stay safe when it comes to your tax bill. Allowable expenses range from repairs and maintenance to insurance policies and legal fees. By claiming these charges, you can reduce your income tax bill and potentially lower the capital gains taxes when selling the property.
This guide explains the main allowable expenses to help maximise your tax relief for each tax year.
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Costs While Buying a Property
The costs and expenses in connection with the purchase are also seen as part of the purchase price but cannot be set off against rental income. We recommend you prepare with a simple statement of other costs as follows:
- Purchase price
- Stamp Duty
- Legal Fees
- Building survey charges
- Stand-alone inspection fee
- Money you paid the auctioneers (if any of you have bought via an auction)
Most of the costs should be in your solicitor’s completion statement
These amounts can be credited from the profit (or added to the loss) when you sell the property. Note all these costs, and save your receipts with them, so that you can also claim capital gains tax relief on the expenses when you come to sell.
But what if it all goes wrong?
One of the first things that confuses people is the UK tax year itself. Unlike a calendar year, the UK tax year runs from 6th April to 5th April the following year. So the 2024/25 tax year started on 6 April 2024 and ended on 5 April 2025.
Why these dates? It’s a quirk of history going back centuries, but you don’t need to understand the history; you just need to know the dates. Once you do, the rest of the self assessment timeline starts to make sense.
What Are Allowable Expenses?
Allowable expenses are the costs you can deduct from your rental income to lower the amount of tax you have to pay.
Costs can only be claimed against rental income if they are considered to be for the “wholly and exclusively” purposes of the rental business. However, the cost of buying an asset or improving it cannot be treated as a revenue expense set against the income from the property. Below are some key expenses you can claim:
Finance Costs (Limited for Residential Properties)
Interest paid and arrangement fees on any loan taken out to purchase or improve the rental property, as well as bank charges on another rental property account, are also included in the finance cost. If it is a repayment mortgage, then only the interest element counts as finance costs, not the total repayments.
In the case of commercial properties, Furnished Holiday Lettings, and residential properties owned by limited liability companies, the trading finance costs are allowed in full.
For other residential properties which are owned by individuals or partnerships, from 6th April 2020, the finance costs are restricted, and only 20% of the finance costs can be claimed against the tax liability on the net rental income after deducting all other expenses and losses brought forward, but before allowing the finance costs. Before 6th April 2020, there was a gradual increase in the restrictions over 3 years.
Maintenance and repair costs
Repair work carried out on the property can be claimed, provided that it is not a capital improvement. If you lived in the property prior to letting it, then work carried out before the property is let is seen as maintenance of the property as a result of private use rather than for rental purposes, so it cannot be claimed.
Repairs can be claimed, and replacements fall under Replacement of Domestic Items Relief.
Rent, rates and council tax
You may pay ground rent if the property is a flat. The tenant normally pays the rates or council tax, but if you do pay these costs or there are any void periods where you pay these costs then these can be claimed.
Property income allowance (alternative to expenses and capital allowances)
Instead of any expense, the property income tax of £1000 can be deducted from the rental income (provided that the income is not received from a connected party). This allowance is only worth it if the expenses are less than £1000 and the actual rent received is more than these expenses. As for the latter, if you opt for the Property Income Allowance, you cannot claim any of the expenses.
The allowance is designed to save people with low rental income from having to declare and pay tax on that income rather than as a general tax-saving measure.
Capital expenditure
The difference between capital expenditure and revenue expenditure is not well defined. For instance, where you buy a property, refurbish it, and then rent it out, this is considered revenue expenditure. However, if you bought a property for less than its market value because it was in poor condition and had to carry out extensive works, this would likely be considered capital expenditure.
Any capital expenditure on the property can be helpful when selling, as it can reduce the amount of potential profits on which you may need to pay capital gains tax (CGT), and in some cases business owners may qualify for reliefs such as Business Asset Disposal Relief on CGT.
Replacement of Domestic Items relief
Annual replacement allowance will be claimed where a residential property is not a Furnished Holiday let or no Rent a Room relief is claimed, expenditure on replacing items of furniture and white goods will be allowed as an expense, less any proceeds on the disposal of the item being replaced. It is important to note that the costs of assets, not of replacement, are not allowed as expenses.
The management of allowable expenses in your property rental business
It is important that you keep a record of all costs related to letting, as they have a significant impact on both helping you maximise your rental income and potentially lowering your tax bill. Expenses can only be claimed over time and must be classified as revenue or capital expenses. Operating expenses are short-term payments essential for running the property, while capital expenditures are long-term investments such as property renovations.
Examples of allowable expenses include:
Legal Fees
Any legal fees for handling short-term leases or tenant problems are tax-deductible. However, legal fees related to property purchases are not deductible.
Insurance Policy
Premiums covering things like building and contents insurance for your rental property can be counted as allowable expenses.
Repair and Maintenance
These are tax-deductible if they are not capital improvements. Regular maintenance and upkeep to keep the property in working condition are eligible.
Cash basis accounting
If you use the cash basis of accounting (common for many small rental businesses), you only report income when received and expenses when paid. This arrangement streamlines tracking your profit and loss and helps control your tax liability.
Expenses Carried Forward
More expenses than rental profits in a given year can be carried forward and applied to future years, thus reducing taxable income.
Understanding what expenses are tax-deductible will help rental business owners claim expenses correctly, reduce the tax bill, and increase profitability, especially when staying informed about current UK tax and business updates.
Contact MMBA Accountants to understand
rental accoutants and rental income tax.
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How to keep books on a rental property
Starting a rental property at zero to one involves recording all income and expenditures of the property. To track this information, record the income received from your tenant on the rental side of your books and account for expenses such as mortgage interest, repairs, maintenance, management fees or administrative costs, utilities, and any insurance.
Record all of this in accounting software, or a spreadsheet, AND make sure you obtained receipts and documents. At tax year-end, compile your financial statements to compute your rental income figures subject to tax, or consider using specialist property tax accountants to ensure everything is correctly reported.
Cutting Down Admin Cost
To reduce the amount of admin work you need to do therefore freeing up more time for your property business, you might also want to think about using property software or accounting tools which often have features that can help automate rent collection, expense tracking, and tax calculations.
You could even outsource the likes of maintenance and property management to help relieve this charge. Additionally, establishing efficient processes to manage documents, invoices, and tenant communication can save you time and allow room to expand your business.
Paying Tax on Profit from Renting Out Your Property
You must pay tax on any profit you make from renting out property. How much you pay will depend on two things: how much profit you make and your personal circumstances, including the personal allowance tax code you are on, such as 1265L.
Your profit is what remains after calculating rental income and deducting expenses or tax reliefs. If you rent more than one property, any profit or loss from all your properties is combined to create a single figure for your property business.
However, profits and losses from overseas properties must be accounted for separately from UK properties.
Tax on rental income from multiple properties
If you are a property investor with several properties, the rent receipts and expenses from all houses can be consolidated, allowing you to offset expenses on one house against receipts on another.
However, if you own properties and also hold a share in a letting business or partnership that profits from letting out properties, it is treated as two separate rental businesses, and losses from one can’t be set off against profits from the other.
Similarly, overseas properties are separated from any UK properties you own, so you can’t combine your UK holiday let with, for example, your Spanish property. Rental income from overseas properties must be declared in a special section of your tax return.
What counts as rental income for landlords?
Your income includes the rent you collect but also any payments tenants make for services provided by the landlord, such as cleaning communal areas, utility bills (hot water, heating, broadband, and water), and arranging repairs.
This also includes any non-refundable deposits you charge and any money left over from returnable deposits at the end of a tenancy.
When to Pay Tax on Rental Income
You pay tax on rental profits each tax year, which runs from April 6th to the following April 5th. Tax returns must be filed, and payments made to HMRC by January 31st, following the end of the tax year, in line with the key UK tax filing deadlines.
For example, rental income earned between April 6th, 2023, and April 5th, 2024, must be declared by January 31st, 2025, reflecting the standard UK tax year start and end dates.
Completing a tax return for rental income tax year
If you are not already receiving a tax return, you must notify HMRC about rental income by October 5th, following the end of the tax year (April 5th). If you earn money from renting out property, you will likely need to submit a self-assessment tax return.
For paper tax returns, the deadline is October 31st. For online returns, you have until January 31st after the end of the year.
Main tax return
If your gross income from UK property is £10,000 or more a year before expenses, you need to complete the main tax return. You will almost certainly need to file a tax return if your rental income exceeds £2,500 after deducting costs.
HMRC can collect tax if the rental income is under £2,500, provided you already pay tax via PAYE (from your salary or pension) and your PAYE tax code such as 1263L, correctly reflects your personal allowance. Contact HMRC for more details.
Supplementary pages
If your income is from UK property (including holiday lets), you must complete the UK property pages. For overseas properties, you will need to complete the foreign pages.
You are disqualified from using this if you’re running a trade like a hotel, guesthouse, or B&B, as such activities are treated as self-employed, where separate rules such as the £1,000 trading allowance may apply instead of property rules.
Contact MMBA Accountants to understand rental accoutants and rental income tax.
Conclusion
In essence, landlords and property investors must be aware of what expenses are allowable against rental income. Even if you recognise the category of an ongoing payment, such as domestic items relief or service charges, you may not realise that it often qualifies as a revenue expense, which can be fully deducted from your rental income. This helps reduce income tax and could provide future tax relief. Keeping track of these expenses will help you manage your rental business profitably while minimising tax implications. The correct approach ensures your business is well-managed and improves profitability.
FAQs
What are rental accounts?
Rental accounts are records that track income and costs from your rental properties. They include rent received, allowable expense claims, and details from your bank account to maintain accurate records. Keeping proper rental accounts helps you calculate total income, monitor performance, and make informed decisions about future profits.
How does the 20% tax credit work for landlords?
For residential lettings, finance costs like mortgage interest are no longer fully deductible. Instead, landlords get a basic rate (20%) tax credit on those costs, applied after calculating total income and other income. This means you cannot fully deduct expenses, but you still receive partial relief.
Do I need an accountant for rental income?
Do I need an accountant for rental income?
You are not legally required to hire an accountant, but it can be helpful. An accountant can ensure you claim every allowable expense, follow special rules, and keep accurate records, particularly when dealing with new properties or complex tax situations.
How to avoid tax on rental income?
Completely avoiding tax is not realistic, but you can reduce it legally. You can deduct expenses, use allowable expense claims, and offset losses from previous years against future profits. Structuring income properly, especially if you rent out part of your own home, can also help under certain special rules.
What is classed as rental income?
Rental income includes rent paid by tenants as well as any additional payments for services like utilities, maintenance, or fees. It also covers non-refundable deposits and certain charges related to residential lettings. All of this contributes to your total income and must be reported accurately.
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