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What are allowable expenses for unincorporated landlords (sole traders)?

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Landlords may deduct allowable expenses from rental income when calculating the amount of profit that is taxable as a sole trader, ie as an unincorporated landlord. (Note the rules for limited companies are different).

Allowable expenses must be wholly and exclusively for the purposes of renting out the property.

>> Useful Resource: HMRC Guide: Allowable Expenses

Examples of allowable expenses for unincorporated landlords

  • General maintenance and repairs to the property, but not improvements (such as replacing a laminate kitchen worktop with a granite worktop)
  • Like for like replacements of appliances, bathroom fittings, carpets, curtain poles, doormats etc
  • Like for like replacements of furniture and furnishings
  • Water rates, council tax, gas and electricity
  • Insurance, e.g. landlords’ policies for buildings, contents and public liability
  • Costs of services, including the wages of gardeners, cleaners, fees for inventory services
  • Letting agent fees and management fees
  • Legal fees for lets of a year or less, or for renewing a lease for less than 50 years
  • Accountant’s fees, e.g. for preparing your accounts and tax return
  • Membership of trade associations such as the NRLA
  • Rents (for sub-letting), ground rents and service charges
  • Direct costs such as phone calls, stationery and advertising for new tenants
  • Vehicle running costs (only the proportion used for your rental business) including mileage rate deductions for business motoring costs

>> Useful Resource: HMRC Guide: Capital Allowances for Rental Properties

>> Useful Resource: HMRC Guide: Replacement of Domestic Items

What is an improvement for unincorporated landlords?

An improvement is when a landlord buys a new item to replace an old item, but the new item is better. Landlords cannot claim a deduction as an allowable for the full cost of the improvement for tax purposes, but only the amount equal the cost of buying an item equivalent to the original.

Let’s take the example of replacing a sofa with a sofa bed. If a new sofa costs £400 but a sofa bed costs £550, a landlord can only claim £400 as a deduction and no relief is available for the extra £150.

A new item is considered an improvement when:

  • it’s not the same or substantially the same as the old item
  • the function has changed, e.g. from a sofa to a sofa bed, or improved e.g. replacing a two-seater sofa with a three-seater sofa.
  • the quality or material of the item is better, e.g. synthetic carpets replaced by woollen carpets

What are not allowable expenses for unincorporated landlords?

  • Capital expenditure, eg the costs of buying the property. They are relevant when calculating future capital gains tax.
  • Refurbishment costs. It can be difficult to pinpoint when refurbishment costs change from being an allowable expense to being capital expenditure. As a rule of thumb, if you can’t let the property without doing the work, and the property was cheaper as a result, then the costs will be capital and not allowable expenses against income. If the landlord needs to go back to brick and replace everything, the work is likely to be capital. If it had a serviceable kitchen that you did not need to change, but you chose to do so whilst you were doing the other work, I would claim that as revenue.
  • Extensions. Adding an extension or converting a loft would be a capital cost and not an allowable expense.
  • The full amount of the mortgage payment – only the interest element of your mortgage payment can be offset against your income by means of a 20% tax credit.
  • Private telephone calls – you can only claim for the cost of calls relating to your property rental business
  • Personal expenses – landlords can’t claim for any expense that wasn’t incurred solely for the property rental business

>> Related Post: What landlords need to know about section 24 (restriction of mortgage tax relief)

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