Before considering what expenses you can deduct if you have rental income, there are a number of reasons why no tax might be due on that income in the first place.
For example, your total taxable income in the UK including the rental income might be less than your personal allowance. If you are letting out a room in your own home, then you may qualify for rent-a-room relief. Or, if you just have a small amount of rental income (less than £1,000 per tax year – before expenses), then you should qualify for the property allowance under which the income will be exempt.
In other cases, you are likely to need to pay some tax on your rental profits. You should therefore ensure that you deduct any allowable expenses when you are calculating your rental profits so that you don’t overpay tax.
If your gross property income exceeds £1,000 but your expenses are less than £1,000, then you are better off claiming the property allowance instead of your actual expenditure.
Note that the rest of this article assumes the property is not a furnished holiday let.
The general rule
The rental business is treated like a trade. As such, the general rule is that you can only deduct expenses which are incurred wholly and exclusively for the purposes of generating the rental profits.
Special rules apply to finance costs (for example, mortgage interest) and capital expenditure (see below). You can also deduct flat rate expenses for motoring costs, based on your mileage (for example, in visiting the rental property).
The basic ‘wholly and exclusively’ rule means that you cannot deduct any expense if the expense in its entirety (that is, all of it) has a dual purpose. This means that if there is a private element to the whole of the expense, it would fail the test. GOV.UK gives an example of a vacuum cleaner which is used to clean both your own home and your rental properties: the purchase of the vacuum cleaner in this case could not be deducted.
What about accountancy fees?
There are of course exceptions. An interesting example is the cost of engaging an accountant to file your personal tax return. The purpose of such an expense – it can be argued – is to comply with your obligations as a private individual and therefore it would fail the ‘wholly and exclusively’ test. However, HMRC do allow a deduction for the expense incurred in preparing rental accounts and in calculating the Self Assessment tax liabilities for the rental business. If the only reason you need to file a tax return is to declare and pay tax on your rental profits, this could be said to be incidental to the calculation of the tax liability on the rental profits and therefore the fees would be deductible.
If an expense is not incurred wholly and exclusively for the rental business, but an identifiable part or proportion is so incurred, that part or proportion may be deducted. The key is that you must be able to identify a specific proportion of an expense incurred. A typical example would be motoring costs based on a proportion of business mileage. This would be an alternative to claiming flat-rate expenses based on the number of business miles travelled.
Let’s take a look at the boxes in the Property pages of a tax return as a guide to the kind of expenses which might be incurred wholly and exclusively for the rental business:
- Rent, rates, insurance and ground rents
Examples would be the cost to the landlord of utilities, council tax, building insurance, etc.
- Property repairs and maintenance
Examples in this section include work that the landlord carries out to maintain the property (though see below concerning capital expenditure)
- Legal, management and other professional fees
Examples include letting agents’ fees, accountancy fees, etc.
- Cost of services provided
Examples include cleaners, gardeners, etc.
However, you might have other expenses which don’t fit easily into any of the above categories. There is no definitive and exhaustive list of expenses which are deductible and expenses which are not – though you can find some examples on GOV.UK. This is where we go back to the basic rule: as long as expenses are incurred wholly and exclusively for the rental business, they should be deductible and you should put them in the ‘Other allowable property expenses’ box.
What about repairs?
When looking at repairs, you need to determine whether or not the expense is a revenue expense or capital expenditure. Revenue expenses are deductible in calculating rental profits, but capital expenditure is not. Instead, capital expenditure is usually deductible when you calculate any capital gain when you sell the property.
It can be really tricky to categorise repairs as capital expenditure or a revenue expense. You need to ask yourself whether the repair constitutes a significant improvement of the property beyond its original condition. If it is, then it is likely to be capital.
However, if the improvement is small – or if the expenditure is due to advancements in technology but the functionality and character of the asset is broadly the same (for example, replacing single glazing with double glazing) – then the expenditure can be treated as revenue.
Let’s say you need to buy a new boiler because the old one is beyond repair: the cost will be usually be deductible as a repair provided the new asset is the nearest modern equivalent and is broadly the same quality or standard as the old one (aside from the fact it may be brand new). Basically, if you replace like-for-like, the cost should be deductible.
However, if you are refurbishing or repairing a property which was bought in a derelict or run-down state, these expenses are likely to be capital expenditure. This is especially the case if the price paid for the property was substantially reduced because of its dilapidated state, or if the property acquired wasn’t in a fit state for use as a rental property until the repairs had been carried out.
What about furniture?
If you incur capital expenditure on replacing ‘domestic’ items which are wholly and exclusively for the purposes of the rental business, there is a specific relief available – even if the new item represents an improvement beyond the nearest modern equivalent (though in this case there is a restriction on the amount you can deduct).
This relief, known as Replacement of Domestic Items Relief, typically applies in relation to things like furniture, furnishings or white goods. It does not apply to ‘fixtures’, like boilers, baths, toilets and fitted furniture.
The amount you can deduct is the cost of the nearest modern equivalent plus the net costs of disposing the old item.
The relief does not apply if your property is furnished holiday accommodation.