As a landlord you want to be maximising your investment and make as much profit as possible, within government regulations and tax rules. A major factor in achieving the highest profits is understanding allowable expenses for landlords.
Submitting expenses correctly will allow you to lower your tax bill, as costs related to your property will be subtracted before you’re taxed.
For example if your rental income is £12,000 per year, and say you have £4,000 worth of allowable expenses, you will only be taxed on the remaining £8,000 (as opposed to the full £12,000).
However landlords must be careful that the correct expenses are being submitted. Any HMRC investigations could result in fines and repayments being issued.
Types of landlords
Depending on if you’re a private landlord or a landlord via a limited company, this will determine what you’re allowed to expense.
Allowable expenses for landlords has changed significantly over the past few years. The is especially the case for mortgage interest rates for landlords operating outside of a limited company, which we will cover further down in this article.
Allowable expenses for landlords
It’s important to keep on top of expenses incurred. Keep receipts as much as possible to ensure if an investigation occurs, you have proof of purchase.
This type of expense can be considerable to landlords who have properties far away from their office/home location.
Visiting rental properties, collecting rent, fixing issues can involve a lot of driving.
Driving incurs fuel costs, impacts wear & tear on the car and will result in higher insurance premiums.
Landlords will have to be aware that while claiming this expense, 100% of the costs are unlikely to be accepted, unless you are 100% using the car only for a rental business.
Most likely you will be using the car for personal journeys.
Say for example the split is 50/50 between landlord activities & your personal life, then you will have to apply that ratio to expenses such as insurances and repairs.
There is a government flat rate mileage scheme; For the first 10,000 miles each year, you can claim 45p per mile. Anything over 10,000 miles, you claim 25p. This could work out a better option for you, however you can’t add other repair, fuel, insurance etc costs on top of this
Office costs & utilities
Some landlords do a lot of work (admin) for their rental properties from an office or a room in their house, which is another suitable expense for landlords to claim.
If you work in an office & have broadband, gas, electric and other utility bills, you can expense these if they are 100% linked to your rental business.
If however you work in a room in your home, then you will have to apportion the costs against your ‘personal activities’
For example, if your office is 1 of 5 rooms of your house, you may have to divide the costs of your utility bills by the number of rooms, therefore in this example only claim 20% for your landlord activities.
Letting agent & property manager fees
Services provided by letting agents & property manages is another allowable expense for landlords.
Landlords may opt for tenant find or fully managed services from a property agent, usually somewhere between 10-15% of monthly rental income.
This cost can be used for lowering your tax bill.
You have to be cognizant of other expenses being impacted. For example it will be difficult to expense multiple car journeys and admin expenses, if you have a letting agent doing most of the work.
If you’re a landlord looking for a letting agent or property manager, Rent Round gives you a comparison of agent fees in your area. Using your postcode, you can quickly see fees, services, ratings & locations of agents in your area.
If you have an accountant doing your tax returns, which include financial information about your property, these fees can be added to your expense list.
You may have cleaning and/or gardening services that help you manage your properties. These are easily tracked and are for sure landlord expenses.
Ground rents & service charges
Your rental property may be part of a set of flats, which will result in usually a set ground rent/maintenance fee. This can be added to your expense list.
Landlord can get a variety of insurances, guaranteed rent and landlord insurances are some of the most common. These should be added to your expense list.
Losses on your property
If you have a collective set of rental properties, any loss making properties can be offset against the other. For example, if 3 of your properties are collectively making a profit of £30,000 but then the 4th made a loss of £2,000, your taxable profit would be £28,000.
There are nuances to factor in related to holiday lets, so if your portfolio isn’t a set of standard buy to lets, you will need to seek advice from your accountant.
Furnishings and wear and tear
Previously landlords could claim a 10% wear and tear tax allowance against furnishings such as televisions, kitchen appliances, beds etc.
Sadly that has now changed and instead landlords can claim tax relief on replacing domestic items.
The relief doesn’t include buy the furnishings in the first place, but more relates to the replacements of existing furniture. So if you’re kitting out a new home for the first time, this type of relief isn’t permissible.
Is interest on your mortgage allowed as an expense?
The answer to this question depends on what type of landlord you are, i.e. if you’re operating as an private landlord or a limited company.
As interest paid on your mortgage is likely to be your biggest expense, it has a big factor on your tax paid.
Unfortunately due to changes in legislation, it means that private landlords are unable to expense interest paid on a mortgage. Previously, if you had a rental income of £1,500 and you paid £500 in interest, you’d only be taxed on the remainder £1,000.
The new tax implications were phased in from 2017 onwards. The breakdown of how the phased in approach came into play is below
Depending on your tax bracket, private landlords now face far larger tax bill. A landlord in the 45% tax bracket pre 2017 with a £10,000 rental income, would have only paid £450 per per, however now the bill would be £2,700
Crucially, landlords that had smaller profit margins, under the new tax rules are likely to see themselves in the red, making a loss on their rental profit
Can landlords operating under a limited company offset interest on mortgages?
Yes, if you’re a landlord operating under the banner of a private company, interest paid on mortgages can be an expense.
For example landlords on an interest only mortgage, being charged £400 a month, can subtract £400 off of their monthly rental income before tax is applied.
This significant saving is why many landlords are now opting to purchase properties under a limited company
There are disadvantages that landlords need to be aware of.
Under a limited company, a proportion of your profits will be held in your business account. Post dividends and any salary payments, any further withdrawals from your business account would incur higher tax rate charges.
Unless you’re happy for the profits to sit in your business account, perhaps earmarking the cash for another asset, then your cash flow may not be as fluid as you wish
Can private landlords switch their properties to a limited company?
Switching your private property into a limited company is costly. There are a host of charges and taxes landlords need to be aware of:
- Capital gains tax: You’ll need to pay this as you’d be effectively selling your property to the business
- Stamp duty: As you’re buying the property under the business, stamp duty is applicable.
- Early repayment changes on your mortgage: Most mortgages have early repayment charges. As you’d be unable to switch the mortgage from a private setup to a limited company, you’ll likely need to clear your mortgage which can cost you 10% of your remaining mortgage value
General advice is if you already have properties setup privately, leave them that way.