Landlord tax changes to allowable expenses came into effect on 6 April 2017. Below, we aim to explain what those changes were and how they might affect you. We give you an overview of what allowable expenses are and how they are used when calculating your rental income profit.
As a landlord you have to pay tax on the profit you make from renting out your property. Your profit is calculated by deducting ‘allowable expenses’ from your rental income.
If you own more than one UK rental property then you need to treat your portfolio as a single business and group all of your rental income and allowable expenses together.
What is an allowable expense?
An allowable expense is anything you have spent wholly and exclusively for the purposes of renting out your property. This broadly means any expenditure in relation to the property’s up-keep.
What expenses are allowable?
Some examples of allowable expenses are:
- General maintenance and repair costs
- Water rates, council tax and gas and electricity bills (if paid by you as the landlord)
- Insurance (landlords’ policies for buildings, contents, etc)
- Cost of services, e.g. cleaners, gardeners, ground rent
- Agency and property management fees
What expenses aren’t allowable?
Not all costs you incur are considered allowable expenses. The most important examples of these are:
- From 2017, your mortgage interest payments. You will still get relief on your mortgage interest payments but at a reduced rate. Read our quick overview of the tax changes to see how the changes will be phased in.
- The capital element on any mortgage repayments
- Items used for your personal enjoyment
Spending money in order to provide a lasting benefit to your property is considered a capital expense.
These outgoings cannot ordinarily be deducted from rental income. Generally capital expenses are when you:
- Improve or enhance the property
- Purchase furnishings and equipment for the property
Relief for replacing domestic items
When spend cannot be considered an allowable expense, or cannot be offset in the future against capital gains tax, you may be able to claim Replacement of Domestic Items relief.
From 6 April 2016, this relief has replaced the Wear & Tear allowance.
The relief applies to:
- Moveable furniture, e.g. beds, wardrobes, etc
- Furnishings, e.g. curtains, carpets, etc
- Household appliances, e.g. washing machines, fridges, etc
For the relief to be applicable the following must be fulfilled:
- The expense must have been incurred to replace a domestic item
- The old item must no longer be available to use at the dwelling
- The new item must be for the exclusive use of the tenants at the dwelling
If your expense falls into the above categories, it does not matter if your rental property is unfurnished, part furnished or fully furnished.
Where a new item is an improvement, you can only claim relief on the cost of an identical item.
For example, if you replace a fridge with a fridge-freezer, and a fridge would have cost £300 and the fridge-freezer cost £450, you can only claim relief on £300.
Take a look at our article about the landlord tax changes for more information on how you might be affected, or read our Guide to Income Tax Essentials for Landlords to make sure you're fully up to date on current legislation.
*Foxtons have consulted a firm of tax advisers with regards to the content. However, this publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, neither Foxtons, or their tax advisers, accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.