A Guide to Offsetting BTL Expenses Against Your Tax Bill

Understanding tax on rental income is crucial for buy-to-let (BTL) landlords aiming to maximise profitability. Without proper knowledge of tax allowable expenses, landlords risk overpaying on their tax bills or missing out on valuable deductions. Staying informed is key to ensuring compliance with HMRC while keeping more of your rental income. This guide explores permitted tax deductions of buy to let expenses with respect to property owned personally, helping you claim eligible expenses and make the most of your investment.

Understanding Tax on Rental Income

Tax on rental income applies to earnings generated from letting out property owned personally. Landlords must declare this income in their annual self-assessment tax return. The amount of tax payable depends on the total taxable income, including earnings from other sources, such as employment, and how much of the total taxable earnings fall into different tax bands. The basic rate of tax on taxable income above the tax-free personal allowance and up to the basic rate threshold is 20%, while the higher rate above that threshold and up to another threshold is 40%, and the additional rate above the latter threshold is 45%.  

BTL landlords can offset many costs against their rental income by claiming tax allowable expenses, thereby reducing their taxable income. Failing to declare rental income accurately can result in penalties from HMRC, making it essential to keep accurate financial records. Additionally, landlords should stay up to date with changes to both tax and BTL regulations, as government policies can change, impacting the deductions available.

Allowable Expenses: What Can You Deduct?

To optimise your tax position, it is important to identify and claim all of your permissible expenses. Allowable expenses are costs incurred wholly and exclusively for the purpose of renting out the property. Key categories include:​

1. Repairs and Maintenance

Costs for repairs and maintenance are tax deductible, provided they restore the property to its original condition without enhancing its value. Examples include fixing a broken boiler or replacing a washing machine which is beyond economic repair with one of similar value or repainting walls to restore them to their previous standard. However, improvements such as adding an extension are considered capital expenditures and are not deductible against rental income.

2. Property Management Fees

Fees paid to letting agents for property management services, including tenant sourcing, rent collection and handling tenant queries, are allowable expenses. These fees can also cover maintenance coordination, property inspections and legal compliance checks to ensure that landlords meet their obligations.

3. Insurance Premiums

Premiums for landlord-specific insurance policies, covering risks such as property and contents damage and loss of rental income, are deductible. Additional coverage, such as liability insurance to protect against tenant injury claims or rent guarantee insurance to cover missed payments, can also be included as allowable expenses.

4. Utilities and Council Tax

If you as the landlord cover utilities or council tax between tenancies or as part of the tenancy agreement, these costs are deductible. This is particularly common in student lets or house shares, where landlords include bills in the rental price to attract tenants. Keeping a clear record of these payments ensures you can claim the correct amount when filing your tax return.

5. Legal and Professional Fees

Expenses for legal services related to tenancy agreements or evicting tenants, as well as professional fees for accountancy services, can be claimed. These includes costs for drafting lease agreements, handling disputes or seeking legal advice on landlord responsibilities.

6. Advertising Costs

Money spent on advertising the property to potential tenants is an allowable expense. Whether you use online property portals, local newspapers or professional marketing services, these costs help reduce vacancy periods and ensure a steady rental income.

7. Ground Rent and Service Charges

For leasehold properties, ground rent and service charges are deductible. These costs are typically paid to the freeholder or management company to maintain shared areas such as gardens, hallways and lifts.

8. Direct Costs

Expenses directly associated with the rental activity, such as phone calls, stationery and travel expenses for property inspections, are allowable. This includes mileage for driving to the rental property, costs for printing tenancy agreements and even postage fees for sending official documents to tenants. Keeping detailed records of these small expenses can add up to meaningful tax savings over time.

Non-Allowable Expenses: What You Cannot Deduct

It is equally important to understand which expenses are not deductible against your rental income. These include:​

1. Mortgage Interest

Prior to April 2020, landlords who owned their BTL property personally could deduct 100% of their mortgage interest payments from their rental income. However, this has since been replaced with a 20% tax credit on the lower of mortgage interest, rental profit (before mortgage interest) and taxable income, aligning with the basic rate of income tax. This change also means that higher or additional rate taxpayers no longer receive relief at their highest marginal rates.

2. Capital Expenditures

Costs that enhance the property's value, such as extensions or significant renovations, are classified as capital expenditures. While not deductible against rental income, they may reduce capital gains tax upon sale.

3. Personal Expenses

Any costs not incurred exclusively for the rental business, such as personal travel or home office expenses unrelated to property management, are not deductible.

Record-Keeping

Maintaining accurate records is essential for substantiating your expense claims and ensuring compliance with HMRC regulations. Landlords should keep all receipts and invoices related to deductible expenses, as these will serve as proof in case of a tax audit. Additionally, retaining bank statements that reflect payments for allowable expenses helps track spending and verifying claims. Organising financial documents efficiently simplifies the tax filing process and maximises allowable deductions, ultimately optimising your tax bill.

Conclusion

Understanding rental income tax and knowing which tax allowable expenses you can claim is crucial for maximising your buy-to-let profits. By keeping accurate records and ensuring you deduct all legitimate expenses, you can significantly reduce your tax liability while staying compliant with HMRC regulations. If you are unsure about specific deductions, seeking professional advice can help you navigate the complexities of tax and buy to let investments. By staying informed and proactive, you can make the most of your rental property while keeping your tax bill as low as possible.

FAQs

Q. Can I deduct mortgage repayments from my rental income?

A. Prior to April 2020, landlords who owned their BTL property personally could deduct 100% of their mortgage interest payments from their rental income. However, this has since been replaced with a 20% tax credit on the lower of mortgage interest, rental profit (before mortgage interest) and taxable income, aligning with the basic rate of income tax. This change also means that higher or additional rate taxpayers no longer receive relief at their highest marginal rates.

Q. Are expenses incurred before letting the property deductible?

A. Yes, pre-letting expenses such as initial repairs, advertising and legal fees are deductible if they are wholly and exclusively for the rental business.

Q. Can I claim for my own labour on repairs?

A. No, you cannot claim for the value of your own labour. However, you can claim for the cost of materials and any third-party contractor fees paid for necessary repairs and maintenance.

Q. Are travel expenses for my rental property deductible?

A. Yes, travel expenses incurred for property management purposes, such as inspections, maintenance or meetings with tenants, are deductible. However, personal travel or commuting costs cannot be claimed.

Q. Can I deduct the cost of furnishing my rental property?

A. If you let out a fully furnished property, you can claim the Replacement of Domestic Items Relief, which allows you to deduct the cost of replacing furnishings such as sofas, beds, and certain goods. However, the initial purchase of furniture for a new rental property is not deductible.

Q. Do I need to provide proof of expenses when filing my tax return?

A. While you do not need to submit receipts and invoices with your tax return itself, HMRC may request evidence during an audit. Keeping detailed records of all expenses is essential to support your claims.

Q. Can I claim for home office expenses if I manage my rental properties myself?

A. If you work from home to manage your rental business, you may be able to claim a proportion of home office costs, such as electricity and internet expenses, but these must be reasonable and directly related to running your property business.

Q. How do I report rental income and expenses to HMRC?

A. You must report rental income and expenses in your Self-Assessment tax return under the property income section. If your total rental income exceeds £1,000, you are required to declare it to HMRC.

Additional Sources:

https://www.gosimpletax.com/blog/expenses-landlords-can-claim-againt-tax/

https://www.thp.co.uk/buy-to-let-allowable-expenses/

https://uklandlordtax.co.uk/allowable-expenses-against-rental-income/

https://www.axa.co.uk/landlord-insurance/landlord-allowable-expenses/

https://www.landlordstudio.com/uk-blog/allowable-expenses-for-landlords