You’ve paid an accountant.
You’ve paid a solicitor.
Both bills relate, in some way, to your rental property.
So can you simply deduct those professional fees from your rental income?
Not necessarily.
Accountancy, legal and other professional fees can be allowable expenses of a property business.
But the fact that the invoice came from an accountant or solicitor doesn’t automatically make it tax deductible.
The important question is:
What did you pay them to do?
“But I’m not self-employed”
Let’s deal with one misconception first.
You don’t have to be self-employed in your day job before you can have allowable rental-property expenses.
Perhaps you work full-time under PAYE and own one rental property on the side.
That doesn’t mean:
“I’m an employee, so I can’t claim landlord expenses.”
Your employment and your property income are separate things.
When calculating the taxable profit from your property business, you look at the expenses incurred wholly and exclusively for the purposes of that property business.
So your employment status doesn’t determine whether an accountancy or legal cost relating to the property business is allowable.
Can landlords claim accountancy fees?
Normal accountancy costs relating to the property business can generally be allowable.
For example, you might pay an accountant to prepare your property-business accounts or calculate the rental profit that needs to be reported.
HMRC’s guidance on legal and professional costs specifically recognises normal accountancy expenses incurred in preparing property-business accounts and, under longstanding practice, normal recurring fees connected with agreeing the tax liability on those profits.
But that doesn’t mean:
“It’s an accountant’s invoice, therefore the whole thing is deductible.”
An accountant could be doing several completely different types of work for you.
And the tax treatment can depend on what that work actually relates to.
What about the cost of my Self Assessment tax return?
This is where the distinction becomes important.
Your Self Assessment return is your personal tax return. It might contain employment income, dividends, capital gains, rental income and other personal tax information.
HMRC’s guidance distinguishes the normal costs of preparing property-business accounts from personal costs such as preparing an individual’s tax return.
So where an accountant’s invoice covers several services, don’t automatically assume that the entire invoice is a property-business expense.
You may need to establish what part of the fee actually relates to the property business.
What about accountancy fees for undeclared rental income?
This one is particularly relevant where rental income hasn’t been reported for several years.
Perhaps you’ve now appointed an accountant to reconstruct the historic position, calculate the rental results and help deal with HMRC.
You might think:
“It’s all about my rental property, so surely the entire professional fee is deductible from my rental income.”
Again, don’t assume that.
HMRC’s treatment of normal recurring property-business accountancy costs does not simply mean that every additional professional fee arising from historic tax problems or an HMRC enquiry becomes an allowable property expense.
The nature of the work matters.
For example, there can be a distinction between accountancy work establishing the underlying property-business figures and additional work dealing with personal tax matters, disclosure issues, penalties or an HMRC investigation.
So if you’ve paid a substantial professional fee to deal with historic undeclared rental income, the correct treatment may require the fee to be broken down according to the work actually performed.
The invoice needs to be understood, not simply labelled “accountancy fees”.
Related reading: If you’re dealing with earlier rental years, read Undeclared Rental Income: What Actually Goes Into an HMRC Disclosure?.
What about legal fees?
The same principle applies to solicitors.
Some legal costs can be allowable property-business expenses.
Others are capital costs or relate to something that isn’t deductible from rental income at all.
So again:
What was the solicitor actually doing?
For example, legal expenses connected with acquiring the property are generally capital rather than ordinary rental expenses.
That doesn’t necessarily mean the cost disappears for tax purposes altogether. A qualifying capital cost may instead be relevant when calculating a future capital gain.
But it isn’t simply deducted from the rent as a normal running expense.
Legal fees connected with tenants
Now compare buying the property with legal work that arises while you’re actually running the rental business.
HMRC gives examples of potentially allowable professional costs including the cost of evicting an unsatisfactory tenant in order to relet the property.
Certain legal costs relating to shorter lets and qualifying lease renewals can also be deductible.
So:
a solicitor’s bill for buying the property
and
a solicitor’s bill dealing with an issue arising from running the rental business
are not automatically treated in the same way.
That’s why the description “legal fees” isn’t enough.
This is the same principle we see with other landlord costs: paying for something doesn’t automatically make it tax deductible.
Read Landlord Expenses: Just Because You Paid for It Doesn’t Mean It’s Tax Deductible.
“But I paid the fee before my first tenant moved in”
And this brings us to another common assumption:
“I paid it before I started receiving rent, so I can’t claim it.”
Not necessarily.
There are rules that can allow certain revenue expenses incurred before a property business begins to be treated as incurred when the property business starts.
Under HMRC’s guidance on expenses incurred before a property business begins, qualifying expenditure can potentially go back as far as seven years before commencement, provided the relevant conditions are met, including that the expenditure would have been allowable if it had been incurred after the property business started.
But this does not turn every pre-letting cost into an allowable expense.
Capital expenditure remains capital.
Personal expenditure remains personal.
And an expense that wouldn’t have qualified after the property business began doesn’t suddenly qualify merely because you paid it beforehand.
We’re going to look at pre-letting expenses separately because they deserve an article of their own.
One important wrinkle with legal costs before the first letting
There’s another reason we shouldn’t use a simple rule like:
“It was before the first tenant, therefore I can claim it under the seven-year rule.”
HMRC’s guidance explains that expenses connected with the first letting or subletting of a property for more than one year can be capital expenditure. Examples can include certain legal expenses, agent and surveyor fees and commission.
So this is precisely why we need to know what the professional fee was actually for.
Timing alone doesn’t determine the answer.
Related video: Professional fees are only one area where landlords can get caught out. In this video, I look at seven landlord expenses that aren’t always treated for tax in the way you might expect.
Landlord Expenses: 7 Costs You Might Think Are Tax Deductible – But Aren’t Always
Three questions to ask about professional fees
If you’ve paid an accountant, solicitor, surveyor or another professional in connection with your rental property, ask:
1. What did I actually pay them to do?
Don’t stop at “accountancy fee” or “legal fee”.
2. Was the work a normal cost of running the property business, or did it relate to a capital or personal matter?
Buying a property is very different from dealing with an existing tenant.
3. If the invoice covers several things, does it need to be broken down?
One invoice can contain work with different tax treatments.
That is why the description on the invoice — and sometimes the underlying scope of work — can matter.
The important distinction
Professional fees aren’t automatically allowable.
And they aren’t automatically disallowable either.
The answer doesn’t depend simply on who sent you the invoice.
It depends on what you paid them to do.
So rather than asking:
“Can landlords claim solicitors’ fees?”
or:
“Can I claim my accountant’s fees?”
the better question is:
“What was this particular professional fee for?”
That gives you a much better starting point for determining the correct tax treatment.
Need help reviewing your rental property expenses?
If you’re a UK landlord and you’re unsure which expenses can properly be claimed, or you’re dealing with rental income from earlier years and need help establishing the correct tax position, you can book a Paid Tax & Property Consultation with Grace Certified Accountants.
We’ll look at your circumstances and help you understand the appropriate next steps.