What tax relief can I claim on my rental property?

This article is for general information purposes and is not intended to provide tax, accounting, financial, or legal advice. You should seek advice from an accountant or professional financial adviser.

Key takeaways

• Landlords can claim a 20% tax credit on their buy-to-let mortgage interest

• Landlords can deduct allowable expenses, such as maintenance and repair costs, from their rental income

• It’s a good idea to seek professional financial advice about tax relief on residential properties

What tax relief can I claim on my buy-to-let property?

There are two main types of tax relief for landlords:

• A 20% tax credit on your buy-to-let mortgage interest payments

• Allowable expenses: expenses you can deduct from your rental income when you work out your taxable rental profit as long as the expenses have been incurred wholly and exclusively for the purposes of renting out the property

Why can I no longer claim the full amount of finance costs on my buy-to-let property?

The Government phased in a new system between 6 April 2017 and 6 April 2020.

Under the old system: You could deduct all buy-to-let mortgage interest and other rental property-related interest from your taxable income.

Now: You can only claim tax relief on your mortgage interest at the basic rate of 20% - regardless of whether you are a basic rate, higher rate or additional rate taxpayer.

Although this has simplified the tax process by offering a flat rate, the changes have made buy-to-let less advantageous for those in the higher or additional tax brackets than before. Under the previous system, higher and additional rate taxpayers enjoyed relief of 40% or 45% respectively.

This change is sometimes referred to as the Section 24 tax change.

It doesn’t apply to you if:

• You’re a UK resident company

• You’re a landlord of furnished holiday lettings

How do I claim the 20% tax relief on my mortgage interest?

When you complete your self-assessment tax return, your tax liability will be calculated based on your rental income minus any allowable expenses.

After your tax bill is calculated a tax credit worth 20% of your mortgage interest payments is deducted from your final tax bill.

If you have unused finance costs in a particular tax year it should be possible to carry this forward.

You should seek advice from a professional financial adviser about the process.

What allowable expenses can I claim on my buy-to-let property?

According to guidance from the HMRC, you can claim these expenses on your rental property, provided they are incurred wholly and exclusively for the purposes of your property rental business:

• General maintenance and property repairs

• Water rates, council tax, gas and electricity (if you and not the tenant pays these)

• Landlord insurance for buildings and contents

• Public liability insurance

• Cost of services, such as gardening and cleaning

• Letting agent fees and management fees

• Legal fees for lets of a year or less, or for renewing a lease for less than 50 years

• Accountant’s fees

• Rents (if you’re sub-letting), ground rents and service charges

• Direct costs such as phone calls, stationery and advertising for new tenants

• Vehicle running costs (but only the proportion used for your rental business). This includes mileage rate deductions for business journeys

What expenses can’t I claim on my buy-to-let property?

HMRC says that you cannot claim for:

• Property enhancements or improvements, which are capital expenditure unless they qualify for replacement of domestic items relief. You should keep records of capital expenses such as adding an extension as you might be able to set them against Capital Gains Tax if you sell the property in the future

• The full amount of your mortgage payment. Only the interest element of your mortgage payment can be offset against your income

• Private telephone calls. But you can claim the cost of calls relating to your property rental business

• Clothing, such as a suit to wear to a meeting relating to your property rental business. HMRC says this is because you are wearing the suit partly for your rental business and partly to keep you warm

• Personal expenses. You can’t claim for any expense that was not incurred solely for your property rental business

How can I reduce my landlord costs?

There are several ways landlords can reduce the costs associated with their properties:

• Switch to a cheaper buy-to-let mortgage deal. It’s usually best when your current deal comes to an end otherwise the charges you may incur for paying off a fixed-rate deal early could outweigh the benefit of switching

• Compare landlord insurance. You can then find a policy that offers the cover you need for less

• Change energy providers. If energy bills are included in the rent – which may be the case if the property is a house in multiple occupation (HMO) – it might be possible to save money by switching to a cheaper gas or electricity deal

• Move properties into a limited company structure. This means you pay corporation tax on rental profits instead of personal income tax. However, setting up a limited company for your property business should only be undertaken after taking professional financial advice

How can I find a better landlord insurance deal?

Landlord insurance is a form of home insurance, which can cover either:

• Contents (if you’re providing a furnished property) and buildings insurance combined

• Buildings insurance

It can offer protection against risks such as:

• Property damage

• Legal liabilities

• Loss of rental income

• The costs of evicting tenants, if necessary

Compare landlord insurance quotes from different insurers to find the best price for the cover you want. Don’t want more tasks on your to-do list? MoneySuperMarket can do the work for you, saving you time and money.