The final minute issues landlords must test earlier than submitting their tax return and paying HMRC

Landlords up and down the country are submitting and paying their tax returns ahead of the self-assessment deadline this Saturday, 31 January.

While missing the deadline will land someone with an initial £100 charge from His Majesty’s Revenue and Customs, not filling it out properly could end up costing landlords much more.

There are a number of details that can easily be overlooked when filing, but which could give landlords access to tax reliefs and cut their bill significantly.

It’s also important that landlords understand what expenses they can claim against their rental income, and against any potential capital gains tax when they sell.

‘Calculating your profit for income tax purposes can be tricky,’ says Elsa Littlewood, tax partner at accountancy firm BDO.

‘You are not allowed to claim for every penny spent. There are careful distinctions to apply between repair and improvement costs, to avoid double-counting between income tax and capital gains tax expenses, to get the tax treatment right.’

These are the rules that landlords need to follow when filing their self-assessment tax return.

Don’t get caught out with gross income 

The first thing for landlords to do is to calculate their gross rental income, meaning the income before any costs and fees are deducted.

Many landlords will use a letting agent that will deduct its own fees before transferring the remaining rent to the landlord.

It’s important that landlords therefore don’t calculate their income based on rent received into their bank statements, but by the rent paid by the tenants.

To do this they will need to check rental statements for each month. These should be provided by their letting agent. 

What expenses can landlords claim?

It’s important that landlords keep a record of any expenses throughout the tax year. Proof of payment leaving a bank account alone will not be enough. They’ll need receipts or invoices for all bills. 

Repairs and maintenance are the obvious ones expenses that landlords can use to reduce their tax liability.  

However, it’s important they distinguish between repairs and improvements. Repairs are deductible against rental income but improvements are not.

Examples of repairs include redecoration, plumbing and electrical repairs. It would also include replacing windows even if upgrading old single glazed to double glazed ones.

The cost of improvements that could add value to the property can’t be counted against income – though they may be deductible against capital gains tax if the landlord later sells the home. Littlewood adds: ‘Costs that improve or upgrade the property are not deductible against rental income. 

‘Extensions, loft conversions, adding new bathrooms and upgrading a basic kitchen to a significantly higher‑spec version will normally be capital rather than revenue. 

‘Landlords also cannot claim for their own time or “labour” doing DIY or management work.’

Elsewhere, letting agents fees and management costs are also tax deductible expenses.

Buildings and contents insurance can also be claimed, as can service charges or ground rents on a leasehold property. 

If there are any void periods between tenancies, landlords will be on hook for council tax and energy bills, both of which can be put down as expenses. 

If a property is furnished and some furniture needs replacing a landlord can also put this cost down as an expense, as long as it’s a like for like replacement.

Elsa Littlewood at tax firm BDO, says: ‘Replacement of domestic items in residential lets, such as like‑for‑like sofas and white goods, is usually covered by the replacement of domestic items relief.’ 

There are other more niche expenses that landlords can claim that may be less obvious. 

‘Landlords looking to reduce their tax bill can claim running costs as expenses including accountancy fees and travel to and from the property,’ says Arjun Kumar, founder of online accountancy service, Taxd.

‘They can also claim their insurance costs back and certain services like the wages of cleaners and gardeners. 

‘Essentially any cost incurred wholly and exclusively for the rental business can be claimed. It’s very important that landlords keep track of these expenses.’

What expenses can you claim if you’ve sold a rented property? 

Many landlords selling their properties are subject to Capital Gains Tax if that property is not their main residence. 

CGT can be reduced by claiming on renovations and capital improvements made to the property – for example, a renovated kitchen. 

Costs related to the sale of the home can be deducted such as legal fees, estate agent fees, and stamp duty. 

The cost of capital improvements – beyond standard maintenance – can also come into play here. 

Kumar adds: ‘Capital improvements, like adding a conservatory or replacing laminate with granite cannot be claimed against your tax bill, but can be used to offset CGT – it’s important that landlords know the difference. 

‘Some landlords can also claim Private Residence Relief if it was their main property for a period of time, too.’

Can mortgage costs be deducted as an expense? 

Landlords who own property in their own name, rather than via a company, get tax relief on their mortgage payments – but only on the interest element. 

This is calculated based on 20 per cent of the interest on their monthly mortgage bill. 

It means a higher-rate taxpayer landlord with mortgage interest payments of £500 a month on a property rented out for £1,000 a month pays tax on the full £1,000, with a 20 per cent rate on the £500 that is being used towards the mortgage.

However, landlords cannot claim the capital repayment portion of their mortgage. This is considered paying off a personal debt, not a business expense. 

Arjun Kumar says: ‘To calculate your annual finance costs, you should review your year-end mortgage statement; however, for interest-only mortgages, you can simply multiply the outstanding loan amount (for example, £100,000) by the applicable interest rate (for example, 5 per cent) to arrive at the total interest paid (£5,000).’ 

Elsa Littlewood adds: ‘Landlords should use their lender’s annual mortgage statement, which splits payments into interest and capital. 

‘Only the interest element – plus any qualifying finance fees – should be used for tax purposes. 

‘If the split is not clear, a specific interest statement for the tax year should be requested from the lender.’

On top of mortgage interest, product fees can also receive tax relief. These fees are typically paid when someone takes out a mortgage, or are added to the loan. It can also include a broker fee and any valuation fees. 

Most landlords add mortgage product fees to the loan, rather than pay them upfront. This makes a difference to someone’s tax position, according to Littlewood.

‘Where a one‑off product or arrangement fee is paid to obtain finance for the rental business, it is generally treated as a finance cost,’ she says.

‘If it is paid upfront, it is normally taken into account in that year; if it is added to the loan, it is effectively relieved over time through the finance cost rules rather than treated as part of the property’s capital cost.’

What if a landlord has an undeclared expense from a previous tax year?

Landlords failing to declare expenses from the previous year is common. Sometimes this can because paperwork arrived just after the deadline or sometimes because they just missed something one year.

However, missed expenses should not simply be bundled into a later year’s rental calculation. 

Landlords can still claim these costs, but the method depends on how much time has passed and what kind of expense it is. 

HMRC says that customers can amend their tax return within 12 months of the statutory filing date which is 31 January following the end of the tax year, or three months from the receipt of a Notice to File, whichever is later.

It also says that where a taxpayer discovers that they have made an error or mistake on their tax return and the time limit for amending the return has lapsed, they are still entitled to make a claim to ‘overpayment relief’. 

This can be done within four years of the end of the tax year to which the claim relates. 

Kumar says: ‘If this was less than 12 months ago, this falls in the ‘amendment’ window so landlords can log into the HMRC portal, go to the relevant tax year, and update the figures. 

‘Their tax bill will be recalculated automatically. If it was over 12 months ago, landlords must write to HMRC to claim overpayment relief. 

‘In this instance, landlords must explicitly state they are making a ‘Claim for Overpayment Relief,’ identify the tax year, and provide proof of the expense – like the mortgage statement or service charge invoice.’

What mistakes do landlords often make?

According to tax advisor Elsa Littlewood, landlords often make quite a few.

‘Common issues include treating improvement works as repairs, double‑counting expenses in both rental and CGT calculations, and claiming full mortgage payments instead of just the interest,’ she says.

‘Some landlords also overlook smaller allowable costs, such as travel to the property and modest professional fees, which can add up.’

What else do landlords need to know about?

There are changes on the horizon for landlords when it comes to tax.

First from April, there are major changes in the way that many landlords will report their income and spending to HMRC.

From 6 April, those earning over £50,000 from self-employment or property income will need to start making quarterly submissions to the taxman. The first filing will be due on 7 August. 

This is part of HMRC’s shift towards digital record-keeping – what it is calling Making Tax Digital for income tax.

The move is expected to affect approximately 780,000 people in its first wave, with another 970,000 to follow from April 2027 and further expansion in 2028.

The first group affected includes sole traders and landlords with gross income over £50,000. 

Those earning between £30,000 and £50,000 will follow in April 2027, with further expansion to those earning £20,000 or more from 2028.

The income threshold is based on gross income, not profits, which means even those making modest earnings after expenses could still be caught by the new rules.

The new reporting regime will likely add further costs, and administrative burdens for buy-to-let landlords.

Then, from April next year, the tax property investors pay on their rental income will be levied at higher rates.

The change will see landlords taxed at 2 percentage points above normal income tax rates. Basic rate tax paying landlords will see their rental income taxed at 22 per cent, up from 20 per cent.

Meanwhile, higher rate tax-paying landlords will see their rental income taxed at 42 per cent, up from 40 per cent today, while additional-rate taxpayers will be taxed at 47 per cent, up from 45 per cent currently.

 

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