If you rent out a property you’re likely to have to pay tax on the income you receive. But you can reduce your tax bill – legally – by offsetting certain expenses related to renting out your property against your tax bill. Not all expenses are allowed under HM Revenue and Customs rules, so it’s important you understand the rules.
What can you offset against tax if you rent out property?
Unless you’re renting out a room under the government’s rent-a-room scheme, you have to declare income you receive from renting out property to HM Revenue and Customs. You normally have to do this by filling in a self assessment tax return.
SAVVY TIP: If you don’t get any other income (or it’s only from tax-free sources, such as ISAs) and you receive less than the personal allowance, which is currently £12,500 (in tax year 2019-20), you don’t have to pay tax on your rental income.
Expenses you can offset against tax
You can only offset expenses against your rental income if they are solely related to your property rental ‘business’.
SAVVY TIP: If you pay for something that’s partly for your use and partly for the rental business (if, for example, you live in the property but rent part of it out), you have to work out the percentage that’s related to your business – and be able to justify it.
The list of expenses you can take away from the income you receive by renting out your property, or part of your property, includes:
- Accountant’s fees
- Council tax
- Ground rent
- Insurance for the property and its contents
- Lawyer’s fees (but not all)
- Letting agent’s fees
- Maintenance costs
- Mortgage interest (but not capital repayments, if you have a repayment mortgage).
SAVVY TIP: Be aware that the rules are changing for higher rate taxpayers from April 2017 onwards and they will only be able to claim tax relief at the basic rate. This is being phased in over a four year period.
- Repair costs (but not improvements). In practice, in certain areas, what used to count as an improvement is now seen as a repair.
SAVVY TIP: According to HM Revenue and Customs, in the past they took the view that replacing single-glazed windows with double-glazed windows was an improvement and therefore counted as capital expenditure. But building standards have improved and the types of replacement windows available from retailers have changed. HMRC says it now accepts that replacing single-glazed windows by double-glazed equivalents counts as allowable expenditure on repairs.
- Letting agent’s fees
- Service charges
- Utility bills such as electricity, gas and/or water
SAVVY TIP: If your income from letting out your property or properties is less than £81,000 in the tax year 2018-19 (or would be if you let your property out for the full year), before you’ve taken expenses off the total, you can fill out a short tax return, which means you don’t have to provide a full breakdown of your income. However, if it’s more than £81,000, you have to provide a full breakdown.
Expenses you can’t claim for
Not all expenses are able to be taken off your income when working out your tax as they count as capital expenditure. They include:
- The cost of the property
- Expenditure which adds to or improves the land or property; for example, converting a disused barn to a holiday home
- The cost of refurbishing or repairing a property bought in a derelict or run-down state
- Expenditure on demolishing a derelict factory to clear space for a new office building; the cost of the new building
- The cost of building a car park next to a property that is let
- Expenditure on a new access road to a property
- The cost of a new piece of land next to a property that is let
- The cost of furniture 1 although if you are renting out a furnished property in the UK or overseas, you can claim a ‘wear and tear’ allowance of 10% of the rent you receive minus any costs such as council tax.
SAVVY TIP: If you prefer, you can claim a ‘renewals’ allowance. This covers the cost of replacing things like furniture and household equipment. To do the calculation, take the cost of the replacement item and take away the amount you got from selling the original (if you sold it) and any extra you paid for buying a better replacement.
- Expenses you incur that aren’t solely for running the letting business.
Allowances that can reduce your taxable profit
There’s an annual investment allowance (AIA) that you may be able to use to claim for your capital costs when you buy things like central fixtures and equipment.
The AIA has temporarily increased to £1 million between 1 January 2019 and 31 December 2020. The amount has changed several times since April 2008. You can only claim for the costs of equipment you use for running your business if you’re a residential landlord (ie you own property that you rent out) except for the communal areas of houses in multiple occupation (HMOs), such as student lets, or communal areas of a block of flats.
If you are spending money in a communal area of a block of flats, expenditure on lifts, alarm systems and water heaters are just some examples of costs that can be included in the Annual Investment Allowance.
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