If you’re a landlord, you probably have plenty of payments going out that relate in some way to your property.
Repairs.
Insurance.
Mortgage payments.
Letting agent fees.
Furniture.
Maintenance.
Perhaps you’ve even got a separate bank account and can clearly see every payment connected with the property.
So it can be tempting to think:
“If I paid for it for the rental property, surely it’s an expense I can deduct from the rent?”
Not necessarily.
One of the important distinctions when calculating rental profits is that money spent on a property doesn’t automatically mean a tax deduction from your rental income.
We still need to understand what you actually paid for and how the tax rules apply to that particular cost.
Start With What the Expense Was Actually For
When reviewing landlord expenses, I don’t simply look at a payment and ask:
“Did this come out of the property account?”
I want to know what it was for.
Was something being repaired?
Was something new being added to the property?
Was an existing item being replaced?
Was the expenditure connected with arranging finance?
Was there any personal element to the cost?
That distinction matters because different types of expenditure can receive different tax treatment.
Two payments can both relate to the same rental property without necessarily being treated in the same way for tax.
Repairs and Improvements Aren’t Necessarily the Same Thing
This is an area that can cause confusion.
Imagine something in your rental property needs work.
You spend money on it, so naturally you might think of that cost as a repair.
But for tax purposes, we need to understand what work was actually carried out.
There can be a difference between repairing or maintaining something that already exists and carrying out work that amounts to a capital improvement.
That distinction can affect whether the cost is deducted when calculating your rental profit or dealt with differently for tax purposes.
So simply having an invoice from a builder doesn’t answer the tax question.
We still need to understand what the builder actually did.
What About the Mortgage?
This is another important area, particularly for residential landlords.
A mortgage payment appearing on your bank statement doesn’t mean the whole payment is a rental expense.
For example, if you’re making capital repayments, you’re reducing the amount you’ve borrowed.
That isn’t the same thing as an allowable property expense.
And the tax treatment of residential property finance costs has changed over the years.
For individual residential landlords, finance costs are generally no longer deducted from rental income in the same way they once were. Instead, the current rules generally provide for a basic-rate tax reduction, subject to the relevant conditions and restrictions.
This becomes particularly important when we’re looking back over several tax years because you cannot assume today’s treatment applied throughout the entire period.
The year matters.
Some Landlord Costs Are More Straightforward
There are, of course, expenses that will commonly arise as part of running a rental property.
Depending on the circumstances, these can include things such as:
- letting agent and management fees
- landlord insurance
- certain repairs and maintenance
- professional fees relating to the rental business
- certain service charges and other costs of managing the property
But even here, I wouldn’t advise simply working from a generic list and assuming everything with the right label is automatically deductible.
The circumstances still matter.
A professional fee, for example, could relate to the day-to-day rental business or to something capital in nature.
The description alone doesn’t always tell us the answer.
And Then There Are Mixed or Personal Costs
Sometimes an expense isn’t wholly connected with the rental activity.
Perhaps part of a cost relates to the rental property and part relates to something personal.
Or perhaps a payment has gone through the same account but isn’t actually a rental expense at all.
This is why looking only at the bank statement can be misleading.
A bank statement tells us that money was paid.
It doesn’t necessarily tell us why it was paid or how it should be treated for tax.
Sometimes we need the invoice, receipt or other supporting information to understand what the payment actually relates to.
Why This Matters With Undeclared Rental Income
This becomes particularly important when somebody is trying to put right several years of undeclared rental income.
You might have years of bank statements and see hundreds of payments connected with the property.
If you’re dealing with older years and some of the paperwork is no longer available, I’ve explained what you can do in Undeclared Rental Income: What If I Can’t Find My Records?
But identifying the transactions is only the beginning.
We still need to establish what the expenses were, which tax year they belong to and what tax treatment applied at the time.
And where records are missing, we need to consider what other information is available rather than simply assuming an amount.
This is one of the reasons preparing a historic rental income disclosure can involve considerably more work than adding together the rent received and subtracting everything that appears to be a property expense.
You can read more about what the wider process involves in Undeclared Rental Income: What Actually Goes Into an HMRC Disclosure?
Related Video
If you’re dealing with undeclared rental income, I explain in the video below why calculating the tax is only one part of preparing the overall disclosure.
Don’t Forget the Evidence
There’s another reason to understand the expenses you’re claiming.
If HMRC asks about a figure later, you should be able to explain where it came from.
Where letting agents have been involved, you may also be wondering what information could still be available. I’ve looked at this in Can HMRC Check Old Letting Agent Records?
That doesn’t mean every landlord will have every receipt from many years ago.
Sometimes records simply no longer exist.
But where information is available, keeping appropriate supporting evidence can make it much easier to explain how the rental profit was calculated.
And if you’ve had to arrive at a figure using other available information, you should understand the basis on which you’ve done so.
The important thing is that your calculation should have a reasonable and explainable basis.
Don’t Claim Less Just Because You’re Unsure Either
There’s another side to this.
Sometimes landlords become so worried about claiming something incorrectly that they go too far the other way and leave out legitimate expenses.
That’s not the answer either.
The objective isn’t to claim as much as possible.
And it isn’t to claim as little as possible.
It’s to calculate the rental profit correctly.
That means including income that should be included and applying the correct tax treatment to the expenses you’ve genuinely incurred.
Final Thoughts
When you’re reviewing your rental property expenses, don’t ask only:
“Did I pay for this?”
Ask:
“What did I actually pay for?”
Because those are two very different questions.
A payment appearing on your bank statement doesn’t automatically make it deductible from your rental income.
The nature of the expense matters.
The circumstances matter.
And sometimes the tax year matters too.
Whether you’re preparing your current rental figures or dealing with historic undeclared rental income, taking the time to understand the expenses properly can make a significant difference to getting the tax calculation right.
Need Help Understanding Your Landlord Tax Position?
If you’re unsure how your rental income and expenses should be treated, or you have historic rental income that hasn’t previously been reported to HMRC, professional advice can help you understand your position and the appropriate next steps.
Book a Paid Tax & Property Consultation to discuss your individual circumstances.
During the consultation, we’ll:
- understand your property and the circumstances you’re dealing with
- discuss the information and records currently available
- identify the main tax issues that need to be considered
- talk through the appropriate next steps based on your situation
You don’t need to have worked everything out before we speak.