What costs can be deducted on your tax return?
NRLA Recognised Supplier Tax Scouts share their advice for landlords when it comes to what costs can be deducted on a self-assessment tax return. Blog written by Gemma Doswell of Tax Scouts.
At TaxScouts, we help a lot of landlords with their tax returns - from buy-to-let landlords to live-in-landlords to Airbnb hosts. And more! As a proud partner of NRLA, we’ve put together this guide to help you navigate HMRC’s allowable deductions. Keep reading!
When you earn money from rental income, you’ll most likely have to file a tax return to declare your earnings to HMRC. You do this by 31st January the year after the tax year you’re filing for. For example, if you earn rental income between 6th April 2020 - 5th April 2021, you’ll file your tax return and pay your bill by 31st January 2022.
One of the benefits of filing a tax return is that you can offset the money you spend on your property business against your earnings. This makes sure that you’re only paying tax on your profits.
What can I expense as a landlord?
Here’s a list of some of the things you can deduct from your earnings as a landlord when you work out your profits:
- Letting agents’ fees
- Accounting fees
- Legal fees
- NRLA membership
- Ground rent
- Services charges
- And more
Basically, you just need to make sure that anything you’re deducting is wholly, exclusively and necessarily for your business.
What about home improvements?
This depends on why you’re making renovations. If you’re fixing things (such as a broken window), this can be claimed as an expense. But if you’re putting in a new kitchen because you wanted to upgrade it, this isn’t eligible to be claimed as an expense as it would be viewed as a property enhancement rather than a renewal. If your replacement kitchen is on a like-for-like basis then it would be viewed as a replacement and therefore allowable against rental income.
You can, however, claim the enhancement expense as an increase in the cost of the property for Capital Gains Tax purposes when you sell the property.
How does it work for live-in-landlords?
If you live in the property and rent out a room or bedsit, you’ll need to split the expenses. This is so that you’re only claiming back costs for your business use. If you claim back your electricity bill, for instance, you can only claim back your lodger’s usage. Not your own personal use.
When it comes to being a live-in-landlord, it may be more cost-effective for you to claim via the Rent-a-Room scheme than to deduct expenses. The Rent-a-Room scheme lets you earn up to £7,500 per year tax-free in rent. If your expenses are lower than £7,500, this would be a simpler solution.
The mortgage interest tax credit
Pre-2017, mortgage interest was 100% deductible for landlords on your tax return. But things have changed. Here’s how:
From the year ended 5th April 2021, you will receive a 20% tax credit (referred to by HMRC as relief for finance costs). This replaces the mortgage interest that was allowable as an expense against your property profits on a reducing sliding scale from the year ended 5th April 2018. Instead of being able to deduct the mortgage interest from your property profits on your tax return, the relief for finance cost will reduce your overall tax charge by the amount of the credit.
If you are unable to utilise the relief for finance costs in your current tax year, it will be carried forward for use in future years.
Read more about the mortgage interest changes and how you’re impacted on the TaxScouts website.
An example of what the property section of a current year Self Assessment would look like can be seen below.
Property Profit on the Self Assessment would be shown as £2,844, however, after
relief for finance costs are considered (£2,525 @ 20% = £505), the profit for tax
purposes is £2,339.
Note: The above example assumes there is no other income in the financial year.