How to reduce your tax bill as a landlord

How to reduce your tax bill as a landlord by deducting many of the expenses you incur when letting out a property.

How these work and what you can claim and allowable expenses a landlord can claim

The annual investment allowance for landlords, Changes to landlords’ ‘wear and tear allowance’
What qualifies for the ‘replacement of domestic items relief and How does the ‘replacement of domestic items relief’ work?

As a landlord, you’re bound to incur expenses – be it letting agent fees, cleaners or the cost of trying to find new tenants.
The good news is that you can reduce your tax bill by claiming for many of the expenses you have to meet. But the rules can be quite complex.

This guide explains all you need to know about allowances and expenses for landlords – and how to make the most of the allowances you have.

Allowable expenses a landlord can claim. As a general rule, landlords can claim the expenses of running and maintaining their property.

If the rent you charge covers services like water or council tax, you’ll need to count the rent you charge the tenant within your income
– but you can claim the costs you pay as an expense.

The most common types of expenses you can deduct are:
water rates, council tax, gas, and electricity
contents insurance
costs of services, including the wages of gardeners and cleaners (as part of the rental agreement)
letting agents’ fees
legal fees for lets of a year or less, or for renewing a lease of fewer than 50 years
accountant’s fees
rents, ground rents, and service charges
direct costs such as phone calls, stationery and advertising for new tenants

The expense should be incurred wholly and exclusively as a result of renting out your property.
Where only part of the expense meets this condition, you can deduct that part from your income

for example, the cost of lighting and heating a property which is partly used for private purposes as well as renting.

If you let only part of your home or let it out for only part of the year, you have to apportion your expenses. You can also claim some of the interest on buy-to-let mortgages.

Annual investment allowance for landlords

As a landlord, you cannot deduct the expenses of a capital nature from the rental income you earn. That means you can’t deduct the cost of building an extension or renovating a home that’s in a rundown state. You may, however, be able to use the cost of these investments to reduce your capital gains tax bill when you come
to sell your rental property.

Changes to landlords’ ‘wear and tear allowance’

If the property or properties you let out are fully furnished, you used to be able to claim for wear and tear of furnishings, such as cookers, carpets, beds and televisions.
The wear and tear allowance allowed you to claim a maximum of 10% of the net annual rent (income less expenses) each year. However, this has now changed.
The government now allows you to claim tax relief on anything you spend on replacing what it labels as a ‘domestic item.’

Crucially, this only applies to items you are replacing. You can’t claim tax relief on the actual cost of kitting out a property for the first time with furniture or appliances.
It can only apply when an item is genuinely replaced and no longer used in the property.

What qualifies for the ‘replacement of domestic items relief’? The government lists a number of examples of what domestic items qualify for this new relief.

These includes:

• Replacement beds
• Replacement carpets
• Replacement crockery or cutlery
• Replacement curtains
• Replacement fridges, washing machines etc
• Replacement sofas

It’s worth remembering that you can only claim for a like-for-like replacement.

If, for example, you bought a new fridge worth £600, but the cost of replacing your old fridge with a very similar one was only £400, you’d only be able to claim £400 relief.
You can also claim for the cost of disposing items (usually electrical goods).

How does the ‘replacement of domestic items relief’ work? You can deduct the cost of replacements domestic items from your rental income tax calculate your net profit for the year, on which you pay tax.

You replace a number of items in your property, ready for some new tenants. These include curtains for £200, a washing machine for £250 (which also costs £50 to dispose of) and a new bed for £400.
The total relief you can claim for is £200 + £250 + £50 + £400, which amounts to £900.

This can be deducted from your annual rental income to work out your tax bill at the end of the tax year.