Residential Property Income: Expenses and Deductions

The 5 key points

Working out your profit or loss

Your taxable rental profit is your gross property income less your allowable expenses. A cost is only allowable if it passes the wholly and exclusively test.

The wholly and exclusively test

• Dual-purpose costs: if a building is used 25% for your letting and 75% privately, only the 25% letting share can be claimed.
• Your own time: you cannot claim anything for the time you spend running your lettings. You can claim the cost of a paid employee who helps run the property business.
• Rent-free or cheap lets: if you let a property free or below the market rate, for example to family, your expenses may not be allowable because they may not be solely for the property business.

Revenue or capital?

Revenue expenses are deducted from your rent. Capital expenses are not, although some capital items get relief in another way.

Capital allowances

• Capital allowances let you deduct a percentage of some capital spending, through the annual investment allowance or writing down allowances. They cover items you use to run the business, such as a computer, printer, tools or a car.
• They are not available for furniture or equipment provided in a residential property, such as beds, wardrobes, sofas or televisions. Replacements of those items are covered by replacement of domestic items relief instead.
• If you use the cash basis, the rules differ: you deduct the full cost of items like a computer or printer as an expense, and capital allowances are only available for cars.

Repair or improvement?

A repair restores something to its original state without improving it. Repairs are revenue expenses. Improvements are capital expenses.

Examples of repairs

• Stone cleaning and re-pointing
• Painting and decorating
• Mending or replacing broken items, such as a broken window
• Replacing roof tiles

Like-for-like replacement

Replacing something with the nearest modern equivalent, such as single glazing with double glazing, is usually still a repair. Replacing it with something that clearly upgrades it is an improvement.

Money spent on a rundown property

If a property is not in a fit state to let when you buy it, the cost of making it lettable is likely to be a capital expense.

Expenses before you start letting

Work through these four questions. If you can answer yes to all of them, you can claim the cost.

Once your property business has started, costs before letting further properties in that business are treated in the normal way.

Mortgage and finance costs

Finance costs include mortgage interest, interest on other loans (including loans to buy furnishings), and fees and other incidental costs of getting the finance. Only the interest part of a repayment counts: repaying the amount you borrowed is never allowable.

Working out the tax reduction

The reduction is the basic rate (20%) of the lowest of three figures: your total residential finance costs (including any brought forward), your property business profit for the year, and your adjusted total income above your personal allowance.

• Enter your finance costs in the residential property finance costs box of your tax return, not with your other expenses. Unused amounts from earlier years go in the brought forward box.
• The tax reduction cannot create a refund.
• If a loan covers both residential and commercial property, work out a reasonable split. Only the residential part is restricted.
• If you have more than one property business, such as UK and overseas lettings, work out the reduction for each separately (HMRC's Property Income Manual, PIM2058).

Travel costs for business journeys

You can claim the cost of journeys made solely for your property business, including trips from home to the let property, whether you use your own vehicle or public transport.

Motoring costs: two methods

Replacement of domestic items relief

Residential landlords can claim the actual cost of replacing domestic items provided for the tenant. You cannot claim for the initial purchase. The relief is available whether the property is unfurnished, part furnished or fully furnished, but not for commercial properties or where you claim rent-a-room relief.

What counts as a domestic item?

• Moveable furniture, such as beds and free-standing wardrobes
• Furnishings, such as curtains, linens, carpets and floor coverings
• Household appliances, such as televisions, fridges and freezers
• Kitchenware, such as crockery, cutlery and pans

Fixtures that are part of the building, such as a boiler or a bath, are not domestic items. Replacing them is normally treated as a repair instead.

The conditions

• You must have actually paid for the replacement.
• The new item must be solely for the tenant's use.
• The old item must no longer be available for use.

How to calculate the relief

• Like-for-like or modern equivalent: a reasonable modern equivalent is not an improvement, so the full cost of the replacement is allowed.
• Upgrades: if the new item is an improvement, for example replacing a sofa with a more expensive sofa bed, the relief is limited to what a like-for-like replacement would have cost.

What has changed, and what is coming

Official guidance

• Work out your rental income when you let property
• Tax relief for residential landlords: how it's worked out, with case studies
• Property Income Manual PIM2058: calculating the finance cost restriction
• Property Income Manual PIM3210: replacement of domestic items relief
• Furnished holiday lettings tax regime abolition
• Changes to tax rates for property, savings and dividend income

Letting property and not sure what you can claim? We can review your expenses, work out your finance cost reduction, keep your records in Xero and get you ready for Making Tax Digital.

This guide is general information based on HMRC's published guidance and webinar, and is not advice for your specific circumstances. Rules change, so check the official guidance or speak to us before acting.