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Expenses and allowances on income from property

If you let out property you can deduct certain expenses and tax allowances from your rental income to work out your taxable profit (or loss). If you have several UK residential lettings you pool the income and expenses together. But you work out holiday letting and overseas letting profits separately.

Allowable expenses

The expenses you can deduct from letting income (unless it's under the Rent a Room scheme) include:

  • letting agent's fees
  • legal fees for lets of a year or less, or for renewing a lease for less than 50 years
  • accountant's fees
  • buildings and contents insurance
  • interest on property loans
  • maintenance and repairs to the property (but not improvements)
  • utility bills (like gas, water, electricity)
  • rent, ground rent, service charges
  • services you pay for, like cleaning or gardening
  • other direct costs of letting the property, like phone calls, stationery, advertising

If your annual income from the letting for the tax year 2010-11 is less than £70,000 (before you've taken off expenses) you include the total expenses on your tax return; if it's £70,000 or over you need to provide a breakdown.

Bear in mind that you can only claim expenses that are solely for running your property letting business. If the expense is only partly for running your business (or if you use the property yourself), then you may only be able to claim part of it.

Non-allowable expenses

When you work out your profit, you can't deduct:

  • 'capital' costs, like furniture or the property itself
  • personal expenses - costs that aren't to do with your letting business
  • any loss you make when you sell the property

But you may be able to claim some allowances instead.

Allowances that can reduce your taxable profit

There are different types of allowance you may be able to claim for your capital costs. Capital costs include expenditure you make on assets like furniture and machinery. The allowances you can claim for some of your capital costs vary according to the type of letting.

UK and overseas furnished residential lettings

For furniture and equipment provided with a furnished residential letting (excluding furnished holiday lettings), you can claim a 'wear and tear' allowance. The allowance is 10 per cent of the 'net rent' - this being the rent received less any costs you pay that a tenant would usually pay.

As an alternative to the wear and tear allowance, you can claim a 'renewals' allowance. This covers the cost of replacing furniture or equipment, including small items like cutlery. To work it out, take the cost of the replacement item and deduct from it:

  • the amount you sold the old one for (if you got anything for it)
  • anything extra you paid for a better one

Once you've chosen which of these allowances to claim for a property, you can't switch between them from year to year.

Furnished holiday lettings

If you own a qualifying furnished holiday letting in the UK or in the European Economic Area you can claim a 'capital allowance' for the cost of each item of furniture and equipment you provide with the property. Or you can claim a renewals allowance (explained above). You can't claim wear and tear allowances.

Once you make a choice for each item, you must keep to it.

To find out how capital allowances work see the section below: 'How much capital allowance can you claim?'

All letting properties

Whatever the type of letting, you can claim a capital allowance on the cost of things that you need for running your property letting business, like cleaning and gardening equipment. You can also claim for equipment that isn't for the use of a single let property, like a boiler that heats more than one property.

How much capital allowance can you claim?

The allowance depends on what you buy. You can usually claim 50 per cent of the cost when you buy it - but sometimes 100 per cent for some environmentally-friendly expenditure. Each year after that, you can claim 25 per cent of what's left. HM Revenue and Customs (HMRC) changes the percentages from time to time. The allowance is deducted along with other expenses in calculating your profits.

You'll get smaller allowances if you use the item privately or for anything other than your business.

Which year do expenses belong to?

You have to allocate expenses to the year they apply to - it doesn't matter when you actually pay them. Sometimes you may have to allocate part of an expense to one year and part to another.

Losses

Normally, if your letting business makes a loss, you can carry it forward to a later year and offset it against your future profits from the same business. If it's a UK holiday letting business, you can offset your loss against all of your other income, not just your property income, for years up to and including 2009-10.

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