What Are Allowable Expenses?
At the heart of claiming expenses against your rental income lies a fundamental principle established by HMRC: the expense must be incurred “wholly and exclusively” for the purpose of renting out your property. This means that the expense must be directly related to your role as a landlord and the activities involved in letting and managing your rental property. If an expense has both a personal and a business element, you can only claim the portion that is directly attributable to your rental business.
Consider, for example, using your personal mobile phone for calls related to your tenants or property maintenance. In such a scenario, you cannot claim the entire cost of your phone bill. Instead, you would need to calculate a reasonable proportion of the bill that reflects the business use.
This could be based on the number of calls made or the amount of time spent on rental-related matters. This “wholly and exclusively” rule is the cornerstone of determining allowable expenses for rental income, and a clear understanding of it is essential to avoid making incorrect claims that could lead to scrutiny in the form of HMRC tax investigations.
The primary focus of HMRC is to tax the profit derived from rental activities, not personal spending. Therefore, any expense you claim must have a direct link to generating rental income. If an expense provides a benefit for both personal and business purposes, only the part of the expense that directly contributes to the business is eligible for deduction. This principle ensures fairness across the tax system and prevents individuals from seeking tax relief on costs that are essentially for their own consumption. Managing allowable expenses can be a real bother for some and our team at The Taxcom is always ready to help you.
Key Categories of Allowable Expenses for Rental Income
Understanding the overarching principle is just the first step. To effectively manage your tax obligations as a landlord, you need to understand the specific categories of allowable expenses for rental income. HMRC permits a wide range of deductions that relate directly to the costs of owning, financing, and managing a rental property.
A. Finance Costs: Understanding the Restrictions and Relief
For many landlords, financing their rental property is a significant cost—and one of the most important allowable expenses for rental income. Mortgage interest, once fully deductible, is now subject to restrictions. Under Section 24, individual landlords no longer deduct the full interest amount from rental income. Instead, they receive a basic rate tax credit of 20% of their finance costs.
Companies paying Corporation Tax are treated differently. They can still deduct full mortgage interest as part of their allowable expenses for rental income, which can significantly reduce taxable profit. This difference makes incorporation a strategic decision for some landlords, especially those with large portfolios or higher-rate tax liabilities.
Other finance-related costs may also qualify as allowable expenses for rental income. These include:
- Arrangement and renewal fees charged by lenders
- Interest on loans used to buy or improve the rental property
- Bank charges for accounts used exclusively for managing rental income and expenses
It’s crucial to remember that capital repayments on a mortgage are not considered allowable expenses for rental income—only the interest portion qualifies. The shift to a tax credit system has caused confusion, especially for higher-rate taxpayers who previously deducted the full mortgage interest directly from rental income. Understanding today’s rules is critical for accurately claiming allowable expenses for rental income and avoiding costly mistakes.