For landlords, the rental property business can provide a useful source of income. For the 2.66 million landlords in the UK, bricks and mortar represent a safe investment, offering a steady, regular return. But just like any form of speculation, it helps to do your research, and undertake the necessary due diligence needed before setting foot in the world of property rentals. 

One of the most important pieces of knowledge worth acquiring is working out what tax you’d need to pay for a given amount of income. Integral to this is understanding just how rental properties are taxed, and the allowances available to offset this amount. 

At Emerald Life, we want to provide existing and potential landlords the confidence to climb the property rental ladder. As such, we’re here to provide a full and comprehensive answer to the question of allowable rental expenses. By doing so, we’ll ensure that you get the most out of your rental property when completing that tax return. 

What is Rental Income Tax?

To be able to know and take advantage of the types of expenses available to a landlord, it helps to understand the nature of rental income tax. 

As defined by HMRC, ‘Rental income is the rent you get from your tenants.’ So far, so simple, right? But just as there are many different types of property, as well as varying personal circumstances for each landlord, there are a few specifics worth keeping in mind. 

It is important to understand that there are different charges depending on the type of property you’re renting out. This includes renting out a room in your house, letting out a property as part of a furnished holiday letting, renting out a foreign property, and renting out a UK property while you live abroad. In each case, the level of tax-free allowance offered differs according to the circumstance, so it helps to work out how much of your rental income you’ll end up paying. 

For example, if you’re renting out a room, you can currently take advantage of the ‘rent a room’ scheme, allowing landlords to claim £7,500 per year tax-free. In most cases however, a standard tax free allowance of £1,000 is obtainable. 

Allowable expenses

Aside from the basic tax-free allowance, landlords can claim the expenses of running and maintaining their property. As a basic rule, such allowances can be deducted from your overall rental income as long as they are ‘wholly and exclusively for the purposes of renting out your property’. Importantly, the costs of capital expenditure cannot be claimed as tax-free. The current HMRC definition of such capital costs include:

  • adding something to the property that was not there before
  • altering, improving or upgrading something that was existing
  • including the purchase of furnishings and equipment for the property

In addition, any work done on the property prior to renting or leasing will also fall under the ‘capital expenditure’ definition. This is especially the case where you buy a property in a ‘derelict or run-down’ state, and either you paid a substantially reduced price for it or it was not in a fit state for rental.

Having broadly established what falls outside the remit of tax-free allowances, we’ll now discuss the primary types of expenditure that can be included as expenses.

General maintenance and repairs to the property

If it’s broke, fix it. And HMRC will let you offset the costs when you pay tax. As long as such changes don’t count as an improvement of your existing property (check the site for the official definition here), you’ll be able to claim back such costs. 

Water rates, council tax, gas and electricity

If you’re covering a tenant’s bills, then you can claim expenses on such fees. As always, remember to keep all receipts and paperwork relating to such bills, and your next tax self assessment will be simple and seamless. 

Landlord insurance policies for buildings, contents and public liability

In case you needed any more convincing about the benefits of home, contents, and liability insurance, landlords with such policies will be able to include such costs to offset their final tax bill. Emerald Life provides an extensive range of high-quality landlord insurance, providing insurance options  for your main residence, second home, landlord and unoccupied buildings.

Plus, all your legal expenses will be covered as well. It’s always the right time to take out home insurance, and our friendly customer service team are well trained to provide the right guidance and information about how to take out a policy that’s right for you. 

Costs of services, including the wages of gardeners and cleaners

Every property requires maintenance. Whether getting someone to mow the lawn or simply utilising an end-of-tenancy cleaning service, such costs fit the definition of ‘running and maintaining’ your property, and are therefore included in the allowable expenses list for your tax bill. 

Letting agent fees and management fees

If you delegate the task of renting out your property to a third party, then their fees can also be included in your expense column. This frequently occurs when renting out a foreign property, when the task of listing and managing your residence is handled by a local letting agent. 

Legal fees for lets of a year or less, or for renewing a lease for less than 50 years

Currently, legal expenses (such as the drawing up of the lease, agent’s and surveyor’s fees and commission) incurred in connection with the first letting or sub-letting of a rental property for more than one year count as capital expenditure and are therefore not allowable expenses. However, if the let is for a year or less, such costs can be included in your tax bill. 

Accountant’s fees

If you’ve enlisted a third party to help you crunch the numbers, then such fees can be included in your expense account. As with all charges, make sure you retain all relevant receipts and invoices.

Rents (if you’re sub-letting), ground rents and service charges

This is particularly common if your rental property is part of a housing development with communal living areas. The rent and service charge for such buildings can be chalked off as an allowable expense, under current guidelines. 

Direct costs such as phone calls, stationery and advertising for new tenants

Finding a new tenant can cost you time and money. Whether creating your online listing, or advertising through the local newspaper, such marketing costs can be included. 

Vehicle running costs (only the proportion used for your rental business) including mileage rate deductions for business motoring costs

If you’re a landlord, chances are you’ve been around the block, and have clocked up a fair few miles on your vehicle. You’d be pleased to hear that you are able to claim such costs as expenses, helping you finance costs to finance costs for your rental business, as long as you maintain adequate record-keeping of your trips, and that they are for the exclusive purpose of maintaining your rental property business. 

Domestic items relief

The replacement of domestic items is also claimable providing that they are wholly and exlusively for the use of your rental property. Tax relief for the replacement of domestic items could include appliances, furniture and other items used in the property.

Emerald Life Home Insurance – free legal cover

In case you run into any issues with filing your tax return, or simply need a bit of advice about what counts as allowable expenses, Emerald Life Home Insurance policy holders have access to a free 24/7 legal helpline that’s open 365 days a year. 

We’re experts in helping landlords and homeowners find a policy that’s right for them. And, once covered, they achieve that peace of mind that comes from having a dedicated helpline for all legal issues, whenever it might be needed.

In most cases, legal cover is included as an add-on that can help with various legal issues such as unfair dismissal at work, tax issues and personal injury.

However, at Emerald Life we provide legal assistance home insurance for free as part of our buildings and contents insurance. But when we say free, we don’t mean low quality. This is a genuine paid add-on from our underwriters that we pay out of our own commission. That is because we believe in being an insurer that truly cares for its customers by offering the best cover we can.

Aside from tax issues and concerns, our legal assistance provides help and advice for the following:

  • Consumer disputes – if you have been refused a service as a breach of the Equalities Act then your legal fees may be covered.
  • Personal injury claims
  • Civil claims as a result of loss or damage to goods in the home
  • Some criminal prosecution defence claims
  • Breaches in a school admissions policy
  • Probate disputes
  • Identity theft

Renting out a property can be an exciting process, but it can also come with its challenges. As expert insurance providers with a reputation for industry excellence, our all-in-one policies are designed to help finance costs, and meet the needs and requirements of modern landlords. And with a friendly customer service team ready to assist you in your decision-making process, we’re eager and willing to assist you in taking that first step. When we say high quality Home and Contents Insurance cover, we mean it. Take a look at our options now and see how to make your rental property dream a reality.