Rental Income: What residential landlords need to know


Are you a residential landlord?

Nicola McCartan, Tax Manager at M.B. McGrady & Co Chartered Accountants answers the four most commonly asked questions on residential rental income.

Q1: What are the rules in relation to mortgage payments?

This is one area that always causes confusion!  Many people believe that because their mortgage payments for their buy-to-let property are basically the same amount as the rental income received, they have no profits and therefore no tax. 

However, if you have a repayment mortgage the only part of this that is deductible against rental profits is the interest element, there is no tax relief for the repayments that relate to capital.  In addition there is now only basic rate tax relief available for mortgage interest meaning anyone paying tax at 40% won’t get full tax relief for mortgage interest.

Q2: What other expenses are allowable against rental income?

Allowable expenses include:

  • Accountancy costs – the cost of preparing your rental accounts but not your personal tax return.  Payments to a letting agent are also allowed.
  • Rates and insurance costs
  • Any travel costs if you are required to visit the property
  • Postage, stationery and telephone costs
  • Repairs to the property that are general maintenance and not improvements.  So you could claim costs of repainting but if you replaced a laminate worktop with a granite one this would be an improvement and not allowed.
  • Improvements to the property are classed as “capital expenditure” and a deduction from rental income is not allowed.  This would apply for things like adding an extension or replacing a kitchen with a much higher spec one. 
  • If your total expenses are less than £1,000 you should claim the property allowance of £1,000 instead of your actual expenses.

Q3: Is there tax relief for furnishing, for example, in furnished lets?

There used to be a straight line 10% of total rental income that you could deduct as an expense to cover this. However, this was scrapped and replaced with Replacement of Domestic Items.  This means that you can claim, as an expense, the cost of replacing things like beds, televisions and fridges. 

It is important to note that there is no tax relief for the initial purchase of these items, only replacing them.  So if you bought a dishwasher for a property that never had one before there will be no tax relief available.

Q4: What do people need to think about if they are considering selling the property?

If you sell a buy-to-let property, and you have made a profit, there will most likely be a Capital Gains Tax liability.  If there is tax due, you must report the gain to HMRC within 30 days of completion and pay the tax at the same time.  This applies even if you already complete tax returns, it is a separate return to HMRC, and you need a Government Gateway ID and login to complete this. 

I would recommend that anyone completing a property sale contacts their accountant for advice as soon as possible to avoid late filing penalties. 

It can take time to gather the information required for the return, so the sooner this is done the better.

Nicola McCartan is a Tax Manager at M.B. McGrady & Co Chartered Accountants. To contact Nicola or a member of the Tax Team, please call 028 9031 6950 or email [email protected].