Are rental property expenses deductible?

Most landlords do a pretty good job of estimating the gross rental income a property can generate. Their mistake is underestimating the true cost of owning and operating an investment property.

Here at Atkinson McLeod, we have approachable consultants who are thoroughly up-to-speed with all areas of the property markets. You can also check our free rental yield calculator.

Below, we set out the property expenses that are deductible and some recent changes in this area.

1/ Rental property profit

When you rent out a property, you must pay tax on any profit you make.

Depending on how much profit you make, and your personal circumstances, will help give you an estimate of how much you will pay overall.

Once you’ve added together your rental income and deducted the expenses you can claim, the amount left is your profit.

If you rent out more than one property, the profit and losses from those properties are combined to arrive at one figure of profit or loss for your property business. Profits and losses from overseas properties must be kept separate from properties in the UK.

2/ Allowable and deductible expenses

A deductible expense is a cost incurred which can be claimed when calculating taxable profits from a business or income source. Individuals with rental properties will incur expenses which may or may not be deductible when calculating the profit which is liable to income tax.

In general, expenses that are incurred wholly and exclusively for the purpose of rental are claimable. Some examples of this includes estate agent fees, building insurance or basic repairs and maintenance.

In addition, if you let a furnished property, you will have the option of claiming wear and tear allowance. The allowance is at a rate of 10% of net rents. If a landlord chooses to claim this deduction, they won’t be able to claim for the replacement cost of furniture at a later date. 

Expenses you cannot claim a deduction for include the full amount of your mortgage payment. Only the interest element of your mortgage payment can be offset against your income.

You will also only be able to claim for the cost of calls relating to your property rental business. Not for private telephone calls. What’s more, other extra expenses that were not incurred solely for your property rental business can’t be deducted.

Rules around mortgage interest tax relief changed in April 2017, phased in over a four-year period. Since April 2020, all financing costs incurred by a landlord will be given as a basic rate tax deduction (20%). You can find out more about the changes here.

3/ Repairs versus improvement of rental property

There can sometimes be confusion about whether expenditure counts as a repair of an improvement of their rental property.

While a repair is classified as a revenue expense and can be offset against your rental revenue, this changes if it’s an improvement. This becomes a capital cost and will only come into play if a landlord sells their rental property.

Capital improvements are not deductible against income. Except when you dispose of the property. Capital improvements are costs which result in additional enduring benefit or value. One possible example of this would be building an extension or loft conversion.

Costs that classify as a replacement are allowable. An example may be for the replacement of a broken shower with a new shower of similar quality. Or, alternatively, the replacement of a boiler of similar standard.

You may have an insurance policy that covers the cost of some repairs to your property. Then, you can only claim the additional expenses that incurred for repairs which the insurance pay-out did not cover.

This also applies if you keep your tenant’s deposit from a tenancy deposit scheme to cover damages they have caused to the property.

You can only claim expenses incurred for repairs in excess of the amount of the deposit that you have retained.

4/ Revenue versus capital

Normally, expenses are counted ‘capital expenses’ if they will be used in the business over an extended period of time. For example, when you add something to the property that wasn’t there before, or alter, improve, or upgrade something that was existing. This also includes the purchase of furnishings and equipment for the property.

Capital expenses are not allowable and aren’t able to be claimed against your rental income. That said, keeping records of them is still advisable. That’s because you might be able to set them against capital gains tax if you ever decide to sell the property in the future.

A landlord can potentially off-set it against any rental income if the expense is a revenue expense. Thereby reducing rental profits and income tax liabilities. Any capital costs will be included in your base costs and will be used to calculate what capital gains tax should be paid.

5/ Claiming losses

If your allowable expenses are more than your rental income, it will result in you making a loss. Typically, you can offset that loss against any profits that arise from the same rental business in future years.

When your rental business ends, any losses that have been carried forward are normally lost as they cannot be set against any other income.

Earlier property losses may be claimed against any profits from the new property. This applies if you continue with the same property business and start to rent again within three years’ time.   

About us

With so much to factor in, it’s vital that you work with an experienced, well-respected letting agent.

If you have any questions about letting a home in the London area, Atkinson McLeod is here to help.

To find out more about our services and current operations, please get in touch with our expert team today. You can find out how much your home could be worth on the current market by requesting a free and instant online valuation here.

Are rental property expenses deductible?
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Are rental property expenses deductible?
Atkinson McLeod discuss in detail whether rental property expenses are deductible.
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