If you let residential property in the UK, you will usually pay tax on your rental profit – broadly, your rental income less the expenses you are entitled to claim.
Most landlords know about the obvious costs, such as letting-agent fees, insurance and repairs. But there are plenty of smaller or less obvious expenses that can easily be overlooked. Over a number of properties and several years, they can add up.
Do you travel to your rental properties to carry out inspections, meet tenants or contractors, collect keys or deal with maintenance?
Where travel is genuinely undertaken for the purposes of the property rental business, the associated costs may be deductible. Keeping a simple record of business journeys can therefore be worthwhile.
Running even a relatively small property portfolio involves administration.
Depending on the circumstances, allowable costs can include postage, stationery, telephone costs, property-management or accounting software and other expenses incurred in managing the rental business.
If you regularly administer the business from home, there may also be an appropriate deduction for the costs associated with doing so.
Accountancy and bookkeeping costs relating to the rental business will generally be deductible.
Certain legal and professional costs connected with the ongoing letting business may also qualify. However, professional fees relating to acquiring or disposing of a property are generally capital rather than normal rental expenses.
Don’t forget the costs surrounding the tenancy itself.
These can include letting-agent charges, advertising, tenant referencing, inventory preparation and check-in or check-out costs.
If you pay separately for any of these services rather than receiving one consolidated invoice from your letting agent, they are particularly easy to miss.
Cleaning between tenants, gardening, boiler servicing, gas and electrical inspections and other routine maintenance costs can all potentially form part of the expenses of the property business.
The important distinction is generally between maintaining or repairing the existing property and making a capital improvement to it.
A property doesn’t necessarily stop being part of your rental business simply because it is temporarily empty.
If it remains available for letting, expenses incurred during a void period may still be deductible. These might include council tax, utilities, insurance and other ongoing property costs that you have to meet while looking for the next tenant.
For leasehold properties, service charges and ground rent incurred as part of the letting business should also be considered.
With larger service-charge demands, however, it is worth understanding precisely what the payment relates to. An amount attributable to significant capital improvements may need different tax treatment from routine maintenance and running costs.
One particularly useful relief is Replacement of Domestic Items Relief.
This can provide tax relief when a landlord replaces items provided for a tenant, including furniture, carpets, curtains, fridges, freezers and other domestic appliances.
The relief generally applies to the cost of replacing an existing item rather than initially equipping a property. Broadly, the deduction is based on the cost of an equivalent replacement, with restrictions where the new item represents a significant upgrade.
It can apply to furnished, part-furnished and unfurnished residential properties, so it shouldn’t automatically be dismissed simply because you don’t regard the property as “furnished”.
The distinction between a repair and an improvement is important.
Replacing something with a modern equivalent doesn’t automatically make the expenditure capital. Building standards and technology move on. For example, replacing old single-glazed windows with modern double glazing can still amount to a repair in appropriate circumstances.
The same principle can apply to boilers, kitchens, bathrooms, roofs, plumbing and electrical systems. If you are simply restoring the property or replacing an existing component with its modern equivalent, the expenditure may be an allowable repair rather than a capital improvement.
Conversely, expenditure which genuinely enhances the property beyond its previous condition may be capital and therefore not deductible from rental income.
In addition to ordinary buildings insurance, landlords may incur rent-guarantee insurance, legal-expenses cover and other policies associated with letting the property.
Regularly reviewing the bank account used for the property business is often a good way of identifying recurring expenses that haven’t found their way into the rental accounts.
This is an important area where the rules have changed significantly.
For an individual with a residential property letting business, mortgage interest and certain other finance costs are generally not deducted in the same way as ordinary property expenses. Instead, qualifying finance costs are normally taken into account in calculating a basic-rate income tax reduction.
The detailed calculation can matter, particularly for higher and additional-rate taxpayers and where rental profits or other income fluctuate.
The simplest way to maximise legitimate deductions is good record keeping.
Ideally, use a separate bank account for the rental business, retain invoices and receipts, record business mileage as it occurs and make sure that occasional expenditure doesn’t disappear onto a personal credit card without being recorded.
At the end of the year, don’t just look at the letting agent’s annual statement. Review your bank accounts and credit cards for costs you paid directly.
This article deals with an unincorporated property letting business – typically properties owned personally or in partnership.
Different tax rules can apply where properties are owned through a limited company, particularly in relation to financing costs. Corporate landlords should therefore consider their expenses and tax position separately.
The individual amounts involved can look insignificant: a few journeys to the property, a replacement appliance, an insurance policy or a bill paid during a void period.
Taken together, however, overlooked expenses can make a meaningful difference to the taxable profit from a property portfolio.
A good annual review shouldn’t simply ask, “What expenses have we recorded?” It should also ask, “What have we forgotten?”