Your guide to landlord tax and allowable expenses

Landlords letting residential property need to be aware of their tax reporting requirements throughout ownership. 

In this guide we will be focusing on: 

• Landlord tax reporting requirements 
• Calculating landlord tax 
• Landlord tax relief 

What are landlord tax reporting requirements? 

Landlords need to be aware that several taxes may apply to their letting business. The following taxes needs to be considered at each stage of property ownership:

Purchase: At the start of your property ownership, Stamp Duty Land Tax (SDLT) will need to be calculated. Different locations in the UK have different legislation, thresholds and rates.

• England and Northern Ireland - Stamp Duty Land Tax (SDLT).
• Scotland - Land and Buildings Transaction Tax (LBTT) 
• Wales - Land Transaction Tax (LTT), will apply in Scotland

Generally, when purchasing a residential property in addition to your main residence the tax will be payable at a higher rate. You can find tax calculators on government websites and a solicitor can help you complete your tax return. 

During ownership: If you let out a residential property you need to consider your income tax and national insurance liability. 

You will need to submit a self-assessment tax return to HM Revenue & Customs (HMRC) to report your rental income where it exceeds £1,000. 

Income tax will be payable on taxable rental profits at the relevant tax rate. 

From April 2026 or April 2027, landlords with income above £50,000 or £30,000 respectively will need to meet Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) rules. This includes using compatible software and sending quarterly updates to HM Revenue and Customs (HMRC). 

Sale: Landlord capital gains tax (CGT) will need to be assessed when you sell or gift a residential property.

Where a taxable gain arises, CGT will be payable at the residential property rate of 18% or 24%, depending on whether you are a basic or higher rate taxpayer. To assist with calculating a potential liability you can use the HMRC CGT calculator. 

You’ll need to report any capital gains and pay the tax within 60 days of completion where your taxable gains exceed your tax-free allowance. 

Non-UK residents must file a CGT return to HMRC irrespective of whether or not a liability has arisen within 60 days of completion. 

How much tax do you pay on rental income in the UK?

Landlords are subject to income tax on the rental profits made during a tax year. Profits can be calculated using the cash basis or the accruals basis.

The cash basis is a simpler way of accounting for income and expenditure. Profit is calculated based on money in and money out in a year. 

Income tax is payable on the profits at the following rates: 

For England, Wales and Northern Ireland: 

Band	Taxable income	Tax rate
Personal Allowance	Up to £12,570	0%
Basic rate	£12,571 to £50,270	20%
Higher rate	£50,271 to £125,140	40%
Additional rate	over £125,140	45%

For Scotland:

Band	Taxable income	Tax rate
Personal Allowance	Up to £12,570	0%
Starter rate	£12,571 to £14,876	19%
Basic rate	£14,877 to £26,561	20%
Intermediate rate	£26,562 to £43,662	21%
Higher rate	£43,663 to £75,000	42%
Advanced rate	£75,000 to £125,140	45%
Top rate	over £125,140	48%

If your gross property income is between £1,000-£2,500, you should contact HMRC as to whether or not a return is required and guidance will be provided. If you property income is more than £2,500, you should register for self-assessment and prepare a tax return. 

How do expenses impact your tax bill? 

Allowable expenditure can be deducted against rental income, reducing your profits and tax liability. Keeping good records of your property income and expenses is essential to: 

• ensure you report this accurately on your tax return and only pay as much income tax as you should 
• meet HMRC's expectations for record-keeping 

Property allowance 

You can get up to £1,000 each year in tax-free property allowance. If your annual property income (before expenses) is more than £1,000, you can use the tax-free allowance instead of deducting any expenses and tax relief for finance costs or other allowances. You can't deduct more in property allowance than the amount of income, i.e. you can't use the property allowance to create a loss. 

If you own the property jointly with others, you're each eligible for the £1,000 property allowance. 

Instead of claiming expenditure against income and tax relief for finance costs, an individual can use the £1,000 property allowance. However, this allowance is not available to utilise against on all forms of rental income. 

You cannot claim the property allowance, if you have property income from: 

1. A ‘close company’ where you are a participator 
2. Your employer (or the employer of a spouse/civil partner) 
3. A partnership where you or someone connected to you are partners 

You also cannot claim the allowance on income from letting a room in your own home under the Rent A Room Scheme. 

What expenses can I claim for my rental property?

For expenditure to qualify as allowable, it should be incurred “wholly and exclusively” for the rental business, and should not be classified as capital. Further HMRC guidance on these conditions can be found here. 

Allowable expenses for landlords include the following types of expenditure: 

Maintenance and repair costs 

Tax relief for this expenditure is available as long as the expense isn't classified capital. The expenditure incurred must therefore be a genuine repair rather than an improvement. 

Examples of allowable maintenance costs include: 

• Interior and exterior painting and decorating 
• Electrical repairs 
• Dealing with water and gas leaks 
• Repairing the roof, floor, gutters, windows and doors 

This is not a definitive list and therefore expenditure should be assessed on a case-by-case basis. HMRC’s guidance on what is classified as a repair can be found here. 

Letting and professional fees 

The following fees could be claimed against property income: 

• Fees for letting agents, accountants and property management companies 
• Legal fees incurred for arranging letting contracts 
• Service charges 
• Rent (for sub-letting) 
• Ground rent 

Other 

• Utility bills including council tax, gas and electricity bills, water bills and TV licence costs 
• Insurance policies for buildings, contents and public liability 
• Advertising costs for new tenants 
• Stationery, postage costs and telephone costs 

Landlord tax relief on finance costs  

Finance costs can no longer be deducted as an expense when calculating taxable profits for individuals with residential property businesses. From April 2020, tax relief for these costs is restricted to a basic tax reduction of 20%. 

The restriction does not apply to companies, commercial lettings or Furnished Holiday Lets (FHLs). 

There are three further things to consider which may reduce the tax relief on finance costs further: 

1. Property losses brought forward must be set against property profits first 
2. Where property profits are less than finance costs, the relief is restricted to the basic rate of tax multiplied by property profits 
3. Where total income is low, and some of the rental profits fall within the personal allowance, the relief is restricted to the basic rate band applied multiplied by the profits actually taxed. 

Any unused finance costs will be carried forward and added to the total finance costs for the next tax year.  

Replacement of Domestic Items Relief (RDIR) 

This relief applies to furnished and unfurnished properties. The relief specifically excludes furnished holiday lets (FHLs) or where Rent A Room Scheme relief has been claimed. 

This relief allows landlords to claim costs for replacing domestic items, including: 

• Moveable furniture (sofas, beds and wardrobes) 
• Curtains and carpets 
• Household appliances (fridges, dishwashers and washing machines) 
• Kitchenware (crockery, utensils and cutlery) 

If the new item is an improvement, the allowable deduction is limited to the cost of an item that is substantially the same. Furthermore, the allowable deduction will be reduced by any disposal proceeds received.  

A new item will be classified as an improvement where: 

• it's not the same, or substantially the same, as the old item 
• the functionally has changed (from a sofa to a sofa bed) 
• the quality or material of the items is upgraded (from synthetic fabric carpets to woollen carpets) 

What can landlords claim towards capital expenditure?

Expenditure incurred on improving or enhancing your property will be classified as a capital expense and cannot be claimed against rental income.

Examples of capital expenditure include:

• Building an extension on the property, like a conservatory, shed or garage.
• Installing a new security system 
• Replacing a kitchen with one of a higher specification 

If you purchase a property in a run-down or derelict state any work to put the property back into a fit state for letting are likely to be capital improvements. 

It is important to keep records of capital expenditure, as these costs can be set against the eventual sale of the property as a capital expense. This will form part of the capital gains tax assessment. 

Get landlord advice and support from TaxAssist Accountants

At TaxAssist Accountants we can offer an extensive range of property tax advice specifically for landlords or those with second properties. To find out more and to book a free initial meeting, call 01332 501 122 or fill in our online enquiry form.

 

Date published 3 May 2023 | Last updated 10 Apr 2024

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.