As landlords, understanding which expenses are deductible from rental income is crucial for effective tax management. Equally important is grasping the fundamentals of capital gains tax (CGT) when selling property. Managing your allowable expenses correctly can significantly impact tax liability and overall profitability.

This guide provides a concise overview to help you comply with HM Revenue and Customs (HMRC) regulations while taking advantage of available tax reliefs.

Allowable expenses against rental income

Landlords can deduct expenses wholly and exclusively incurred for the rental business to reduce taxable rental income. Keeping accurate records of these costs ensures compliance with HMRC and prevents unnecessary tax overpayments.

Common allowable expenses include:

• Finance costs: Interest on loans and mortgages related to the rental property. The full deduction for mortgage interest has been replaced with a 20% tax credit on interest payments. If the property is owned through a limited company, mortgage interest can still be fully deductible as a business expense.
• Property maintenance and repairs: Routine repairs, such as fixing leaks, replacing broken windows, or repainting, are allowable expenses. However, capital improvements – extensions, loft conversions, or upgrading from single to double glazing – are not deductible as expenses against rental income. These are instead considered capital expenditures and can be offset against CGT when selling the property.
• Insurance premiums: Landlord-specific policies, including building, contents, public liability, and rent guarantee insurance, are tax-deductible. Ensuring adequate cover can protect against unexpected costs such as tenant damage or legal disputes.
• Ground rent and service charges: Landlords of leasehold properties can deduct regular ground rent and service charges, common in flats and managed estates.
• Council tax and utility bills: If the landlord covers council tax, electricity, gas, or water bills for tenants (common in HMOs), these can be deducted as expenses. However, landlords cannot claim these costs if tenants pay their bills.
• Management and letting agent fees: Payments to property management companies or letting agents for tenant finding, rent collection, and maintenance coordination are deductible. These can amount to 10-15% of rental income, making them significant costs worth claiming.
• Legal and professional fees: Accountancy fees, legal costs for drawing up tenancy agreements, and eviction-related expenses are deductible. However, legal fees related to property purchases or capital improvements cannot be claimed against rental income.
• Advertising and administrative costs: Advertising for new tenants, phone calls, stationery, and rental management software can all be included in allowable expenses.

Maintaining well-organised records, including invoices and receipts, supports expense claims and avoids potential disputes with HMRC.

CGT considerations

Landlords who sell a rental property for a profit may be liable for CGT. This tax is applied to the gain made on the sale rather than the total sale price. Understanding what affects CGT liability can help landlords plan and reduce their tax burden.

Key CGT points for landlords:

• Reporting and payment: Since 2020, CGT on the sale of UK residential property must be reported and paid to HMRC within 60 days of completion. Late filings can result in penalties and interest charges.
• CGT rates: The CGT rate for residential property disposals is 18% for basic-rate taxpayers and 24% for higher-rate taxpayers.
  Annual exemption: The CGT tax-free allowance for 2024/25 is £3,000 per individual, down from £6,000 in 2023/24. Any gains exceeding this threshold are taxed at the applicable CGT rate.
• Deductible costs: Landlords can deduct specific costs from their CGT liability, including:
  • The original purchase price of the property.
  • Stamp Duty Land Tax (SDLT) is paid at the time of purchase.
  • Legal, estate agent, and conveyancing fees from the purchase and sale.
  • Capital improvements made during ownership (such as an extension or loft conversion).

For landlords selling jointly owned properties, each owner can use their CGT allowance, potentially doubling the tax-free exemption.

Reducing CGT liability

Several tax reliefs can help minimise CGT on property sales:

• Private Residence Relief (PRR): If the property was once the landlord’s main residence, PRR may reduce the taxable gain for the years it was occupied as a home.
• Lettings Relief: Previously, it was more generous, but lettings relief now only applies if the landlord lived on the property with tenants at some point.
• Gift transfers: Transferring property ownership to a spouse before selling may help reduce CGT if both individuals are able to utilise their tax-free allowances.

With ongoing tax changes and new policies affecting property investors, staying informed and planning can prevent unexpected tax bills.

How we can help with allowable expenses and CGT

Managing rental property tax efficiently requires careful planning and an up-to-date understanding of HMRC rules. Claiming all allowable expenses ensures rental income is taxed fairly, while strategic CGT planning can significantly reduce tax on property sales.

At GHLD, we provide expert accounting and tax advisory services tailored to landlords. Whether you need help with expense claims, CGT calculations, or tax-efficient structuring of your property portfolio, we ensure compliance with HMRC while optimising your tax position.

Contact us for expert advice regarding allowable expenses and CGT.