Landlord Allowable Expenses: What You Can and Cannot Claim

Revenue costs you can deduct and capital costs you cannot

The first thing every landlord needs to understand is the split between revenue costs and capital costs. Revenue costs are the running costs of letting a property. You can deduct these from your rental income to work out your taxable profit. Capital costs relate to buying, adding to or substantially improving the property, and these are not deducted from rental profit. Instead they may reduce a future capital gain when you sell.

A cost is allowable when it is incurred wholly and exclusively for the purpose of renting the property out. If a cost has a private element, such as a phone you also use for personal calls, you can only claim the business share.

The most common allowable running costs are:

• Letting agent and management fees, including the cost of finding tenants and ongoing management.
• Repairs and maintenance that restore the property to its original condition, such as redecorating, fixing a boiler or replacing broken tiles.
• Buildings and contents insurance.
• Ground rent and service charges on a leasehold property.
• Council tax or utility bills where you as the landlord pay them rather than the tenant.
• Accountancy fees for preparing your rental accounts and tax return.
• Certain travel costs for visiting the property to inspect it or carry out management duties.

The wear and tear allowance no longer exists. In its place is replacement of domestic items relief, which lets you claim the cost of replacing items you provide for the tenant, such as a sofa, bed, carpet, curtains or white goods. The key word is replacement. You cannot claim for buying an item for the first time when you furnish a property, and if you replace an item with a much better version you can only claim the cost of a like for like replacement, not the upgrade.

There is also the property allowance, which is £1,000. If your gross rental income for the year is £1,000 or less, you usually do not need to report it at all. If your income is higher, you can choose to deduct the £1,000 allowance instead of your actual expenses, but only when your real costs are below £1,000, which is rare for a landlord with a mortgage. You cannot use the allowance and claim actual expenses on the same income.

If you would like a complete walk through of these costs and how they apply to your own lettings, our landlord tax service can review your figures and make sure nothing is missed.

The mortgage interest restriction and the 20% finance cost reducer

This is the area that causes the most confusion, so it is worth taking slowly. In the past, landlords could deduct mortgage interest from their rental income as a normal expense. That is no longer the case for residential lettings.

For 2026/27, you cannot deduct any of your residential mortgage interest or other finance costs from your rental profit. Instead you receive a basic rate tax reduction. This means your finance costs are not an expense at all in the profit calculation. They are dealt with separately as a tax reducer worth 20% of the finance costs.

Finance costs include mortgage interest, interest on loans to buy furnishings and any fees connected with arranging the borrowing. The tax reduction is the lower of 20% of your finance costs, 20% of your property profits, or 20% of your total income that exceeds your personal allowance.

For a basic rate taxpayer the result is broadly similar to the old system. For higher rate taxpayers the change increases the tax due, because relief is given at 20% rather than 40%. This is why so many landlords have looked again at how they hold their properties. If you want to understand the effect on your own position, our accountants for landlords can model the numbers for you.

Repairs versus improvements and joint ownership

Telling repairs apart from improvements is one of the trickiest judgements a landlord makes. A repair puts something back to the condition it was in before. An improvement makes the property better than it was, or changes its character.

Replacing a worn out kitchen with a similar standard kitchen is generally a repair. Ripping out a small kitchen and fitting a large high specification kitchen, or knocking two rooms into one, is an improvement. Replacing single glazed windows with modern double glazing is usually accepted as a repair, because it is the modern equivalent of what was there before.

Where a property is owned jointly, the rental income and allowable expenses are normally split in the same proportion as ownership. Married couples and civil partners who own jointly are taxed on a 50:50 basis by default, although they can elect to be taxed on their actual shares if ownership is unequal.

Getting the split right matters, because it affects who pays tax and at what rate. Keeping clear records of who paid for what makes your Self Assessment far simpler at the year end.

When you eventually sell a residential property that is not your own home, any capital gain must be reported and the tax paid within 60 days of completion. This is a strict deadline and it is separate from your normal tax return, so it pays to work out the figures before you complete. You should also plan for Making Tax Digital for Income Tax. From April 2026, landlords whose gross rental and self employed income is over £50,000 must keep digital records and send quarterly updates to HMRC, and from April 2027 this extends to those over £30,000.

A worked example

The first step is to work out the rental profit. Crucially, the £6,000 of mortgage interest is left out of this calculation, because finance costs are no longer an expense. Priya adds up her other allowable costs: £1,440 plus £900 plus £300 plus £200, which comes to £2,840.

Her rental profit is therefore £14,400 less £2,840, which is £11,600. This is the figure that is added to her other income and taxed.

Now the finance cost reducer comes in. Priya does not deduct the £6,000 interest from her profit. Instead she receives a basic rate tax reduction of 20% of that interest. That is 20% of £6,000, which is £1,200. This £1,200 is taken off her final tax bill rather than off her profit.

So if Priya is a higher rate taxpayer, her £11,600 profit is taxed at her marginal rate, and then £1,200 is knocked off the tax due. If she had been able to deduct the interest in full at 40%, she would have saved £2,400, so you can see why the change costs higher rate landlords more. For a basic rate taxpayer the two methods give a very similar result.

Common mistakes

The most frequent errors we see are easy to avoid once you know about them:

• Treating mortgage interest as an expense. It is no longer deducted from profit. Putting it in the costs column overstates your relief and produces the wrong tax.
• Claiming an improvement as a repair. Upgrading rather than restoring is a capital cost, not a deductible running cost.
• Claiming the first set of furniture. Replacement of domestic items relief only covers replacements, not the initial cost of furnishing.
• Forgetting the 60 day capital gains deadline when selling, which leads to penalties.
• Splitting joint income wrongly, for example claiming all the costs against one owner when the property is held jointly.
• Keeping no evidence. Recording a cost without keeping the receipt or invoice leaves you unable to support the claim.

What you should do

Start by keeping a simple, separate record of all your rental income and costs, ideally in cloud software so you are ready for Making Tax Digital. Photograph and store every receipt and invoice as you go.

Each year, separate your costs into running costs you can deduct and capital costs you cannot, and keep your finance costs in their own column so the 20% reducer is applied correctly. If you own jointly, agree and document how income and costs are split.

Before you sell, work out any capital gain in advance so you can meet the 60 day reporting and payment deadline without stress. If any of this feels uncertain, speak to us. Our accountants for landlords handle the figures, the reliefs and the deadlines so your return is accurate and your tax is no higher than it needs to be.

Frequently asked questions