You are taxed on profit, not rent
UK landlords pay income tax on rental profits. Profit is rent received in the tax year, minus allowable expenses in the same year. Not the gross figure from your bank.
What is allowable
- Letting agent and management fees.
- Insurance: buildings, contents, landlord liability.
- Council tax and utilities for any period you were covering them (between tenants, or in HMOs).
- Repairs and maintenance (not improvements, see below).
- Service charges and ground rent on a leasehold property.
- Legal fees for a lease shorter than one year, or renewal of a lease of less than 50 years.
- Accountant fees for preparing the rental part of your return.
- Mileage to the property at 45p per mile for the first 10,000 miles, then 25p after.
The mortgage interest rule
Since April 2020, you no longer deduct mortgage interest from rental income directly. Instead you get a basic-rate tax credit worth 20% of the interest you paid. For a basic-rate taxpayer this is roughly neutral. For a higher-rate taxpayer it costs real money, because you are effectively paying tax on income you never saw.
If the property is held in a limited company, this rule does not apply and interest is fully deductible against company profits. Whether that is worth the restructuring cost is a separate question.
Repair or improvement
This is where most mistakes happen. The test is like-for-like replacement.
- A broken boiler replaced with a similar-spec boiler is a repair. Deductible this year.
- A kitchen refit that upgrades layout and specification is an improvement. Not deductible against rental income, but it increases your base cost for capital gains tax when you sell.
- Replacing a carpet with a similar carpet, or a sofa with a similar sofa in a furnished let, is covered by Replacement of Domestic Items relief. Deductible.
Multiple properties
UK property is treated as one business for tax, even if you own several. You pool the rents and expenses across properties and declare one net figure. Losses on one property offset profits on another in the same year. Unused losses carry forward.