Tax on property and rental income Allowable expenses and allowances
To work out your taxable rental profit, subtract any allowable expenses incurred wholly and exclusively as a result of renting out your property and then deduct any allowances you are entitled to.
The most common types of expenses you can deduct are:
- water rates, council tax, gas and electricity
- maintenance and repairs to the property (but not improvements)
- and contents insurance
- interest on a mortgage to buy the property
- costs of services, including the wages of gardeners and cleaners
- letting agents fees
- legal fees for lets of a year or less, or for renewing a lease of less than 50 years
- accountant’s fees
- rents, ground rents and service charges
- other direct costs such as phone calls, stationery and advertising for new tenants
The expense should be incurred wholly and exclusively as a result of renting out your property.
Where only part of the expense meets this condition, you can deduct that part from your income – for example, the cost of lighting and heating a property which is partly used for private purposes as well as renting.
If you let only part of your home, or let it out for only part of the year, you have to apportion your expenses.
Landlord’s energy saving allowance
Up until April 2015 you can claim for the cost of loft, wall and floor insulation, draught-proofing and insulation for hot water systems (up to £1,500 per residential property each year).
It cannot be claimed if you are using the rent-a-room scheme or for furnished holiday lettings.
Annual investment allowance
You cannot deduct expenses of a capital nature. That means you cannot deduct the cost of the property you are letting, expenditure that adds to or improves the property or the cost of renovating a property in a run-down state.
But you do get an annual investment allowance and other capital allowances.
From 1 January 2013 (until 1 January 2015), you can deduct up to £250,000 a year of capital spending for many types of capital spending using the annual investment allowance, such as commercial vehicles, computers, tools and business furniture. In 2012-13 the limit was £25,000. Transitional arrangements apply, depending on your accounting period.
If you spend more than £250,000, the excess is carried forward and each year (including the year you buy the item) you can claim 20% of the balance as a writing-down allowance or 10% if the item is an integral part of the building or is a long-life asset (something that has a useful economic life of at least 25 years when it's new).
UK vs foreign properties
All your furnished holiday lettings are treated as one activity, all your other UK rental properties as another and all your foreign lets as another, and you get a separate £50,000 allowance for each one.
You can’t claim the AIA or writing-down allowance for any spending on buying the property or work on the building, such as adding an extension. Except for UK holiday lettings, you can’t claim the AIA or writing-down allowance for furnishings and equipment for the use by the tenants in a furnished rental property. See Wear and tear allowance, below.
Wear and tear or renewals allowance
If the property or properties you let out are fully furnished, you can claim for wear and tear of furnishings, such as cookers, carpets, beds and televisions.
You can choose whether to claim the renewals allowance or the wear and tear allowance, but you can’t chop and change methods from year to year.
With the renewals allowance, you can claim the cost of furnishings as you replace them.
But you have to deduct any money you make when disposing of them, and the cost of any improvements (for example, if you replace a washing machine with a washer-dryer).
Wear and tear allowance
The wear and tear allowance allows you to claim 10% of the net annual rent (income less expenses) each year. Possible advantages of this method are that it’s easy to calculate and simplifies record-keeping, and you might save if it comes to more than your actual expenditure on furnishings.