Getting your property expense claims right isn't just about ticking boxes on a tax return. It directly impacts how much tax you pay and whether HMRC might query your claims. Many landlords either miss out on legitimate deductions or claim things they shouldn't, both of which can prove costly.
The rules for property deductions work like security gates at an airport, your expense needs to pass through two checkpoints before it qualifies. Miss either one or the deduction gets rejected.
What Are the Two Main Tests Every Expense Must Pass?
Before any cost can reduce your taxable rental profit, it must satisfy two fundamental requirements:
The Purpose Test: "Wholly and Exclusively"
Your expense must serve your property business and nothing else. HMRC examines why you actually spent the money, not just what you say the reason was. This creates problems when expenses serve dual purposes both business and personal. Technically, if a single expense serves both a business and a private purpose, the entire amount is disallowed. However, where a specific, identifiable proportion of an expense is incurred wholly and exclusively for business purposes, that distinct portion may be deducted.
Consider these common situations:
Using your car for property visits
Track your business mileage separately from personal trips. If 70% of your annual mileage relates to property inspections, repairs, and tenant meetings, you can claim 70% of your running costs.
Managing properties from home
You can claim a fair portion of heating and lighting costs for the hours and space used exclusively for business. This requires calculation based on actual usage patterns.
The Nature Test: Revenue Vs Capital
The second checkpoint distinguishes between two fundamentally different types of spending. Revenue expenses keep your business running day-to-day such as repairs, agent fees, insurance. Capital expenses acquire or fundamentally improve assets such as buying properties, adding extensions, major renovations.
Revenue expenses provide immediate tax relief by reducing this year's taxable profit. Capital expenses generally cannot be deducted from annual rental income, though they might reduce tax eventually through capital allowances or when you sell the property.
Expense Type | Tax Treatment | Examples |
|---|---|---|
Revenue | Deductible from current year profit | Repairs, maintenance, agent fees, insurance |
Capital | Not immediately deductible (may qualify for capital allowances or CGT relief) | Property purchase, extensions, major improvements |
An Important Exception: Cash Basis Accounting
If you're an unincorporated landlord using cash basis accounting, different capital expenditure rules apply. See our cash basis guidance for details on what qualifies for deduction.
How Do I Know If Work Is a Repair or an Improvement?
This question causes more confusion than almost any other aspect of property tax. Getting it wrong means either losing legitimate deductions or facing HMRC challenges.
What Counts as a Repair?
A repair restores something to its previous working condition by replacing worn-out parts. The building itself is "the whole," so replacing subsidiary components that keep the building functioning as before qualifies as repair work.
Revenue repairs you can claim immediately include:
Painting and decorating internal and external surfaces
Stone cleaning, repointing brickwork, treating damp or rot
Replacing broken windows, doors, or damaged furniture
Fixing or replacing roof slates, flashing, and guttering systems
What Makes Something an Improvement?
An improvement creates something significantly better than what existed before. You're enhancing the asset beyond simple restoration. Adding a new floor to a building is clearly an improvement. Replacing storm-damaged roof tiles is clearly a repair. The difficulty lies in the grey area between these extremes.
Can I Use Modern Materials Without Creating an Improvement?
Technology advances constantly. You cannot realistically replace Victorian components with identical Victorian materials. The reassurance here is using modern equivalents that serve the same function remains a repair.
Materials That Keep Repair Status:
Wooden beams replaced with steel beams performing the same structural role
Lead water pipes replaced with copper or plastic equivalents
Single glazing replaced with double glazing (due to modern standards)
The deciding factor is functionality. If the new material simply performs the original function using current technology, it's still a repair. If you're deliberately increasing the building's capacity or performance such as installing stronger beams to support heavy machinery that wasn't there before, that's an improvement.
Minor performance gains that naturally result from modern materials don't change the character of the work.
What If I Buy a Property Needing Major Work?
Timing matters enormously. Repairs to maintain an existing let property are deductible. Repairs immediately after purchase may be capital, particularly if you bought the property in poor condition.
The Dilapidated Property Rule
HMRC applies three tests to determine whether post-purchase repairs are capital:
Test | What HMRC Examines |
|---|---|
Fitness for use | Could you legally let the property before the repairs? |
Purchase price | Did the poor condition significantly reduce what you paid? |
Legal obligation | Were you contractually required to do the repairs as part of the purchase? |
The underlying logic is buying a property in good condition is a capital purchase. Buying a wreck and fixing it is equally capital; you're effectively completing the purchase. Only once the property reaches lettable condition does ongoing maintenance become revenue expenditure.
This prevents property investors from converting what is essentially part of their capital investment into immediately deductible repairs simply by choosing to buy properties needing work.
How Does the Interest Restriction Affect My Finance Costs?
The tax treatment of mortgage interest and other finance costs changed fundamentally for residential property landlords.
For individual landlords, trustees and partnerships letting residential property, interest is no longer deducted when calculating profit. Instead, you receive a tax reduction worth 20% (the basic rate) of your finance costs. This means higher earners no longer benefit from deducting interest at their marginal tax rate.
Who This Basic Rate Restriction Doesn't Affect:
Limited companies (which deduct interest normally under different rules)
Commercial property landlords
Furnished holiday lettings (until April 2025, when FHL treatment ends)
The restriction applies to interest on loans for acquiring, constructing, or adapting residential property, plus economically equivalent payments and incidental loan costs.
How Do I Split Interest on Mixed-Use Properties?
When a single property combines residential and commercial use, perhaps a shop with a flat above you must apportion the interest on a "just and reasonable" basis. The law doesn't mandate one specific method but requires fair reflection of actual use.
Acceptable Apportionment Methods
Method | When to Use | Example |
|---|---|---|
Original cost | When you know acquisition costs for each part | Flat cost £150k, shop £100k = 60%/40% split |
Floor area | When costs aren't separately identifiable | Residential 200 sqm, commercial 100 sqm = 67%/33% split |
Rental value | For complex overdraft situations | Residential rent £12k, commercial £8k = 60%/40% split |
The method you choose must be applied consistently and supported by records. You cannot manipulate the apportionment to artificially minimise the restriction.
How Is the Tax Reduction Actually Calculated?
The calculation involves five steps to determine what's called the "relievable amount" or "L" factor:
Which Day-to-Day Property Expenses Can I Deduct?
Most regular running costs follow the "wholly and exclusively" rule, but several categories have specific interpretations you need to understand.
Are Professional Fees Deductible?
Professional fees divide clearly between revenue costs you can claim and capital costs you cannot.
Deductible Revenue Fees:
Accountancy for tax return preparation and compliance work
Agent commissions for collecting rent and managing tenancies
Legal costs for evicting problem tenants so you can re-let
Lease renewal costs for terms under 50 years (excluding premium-related costs)
Membership fees for landlord associations
Rent arbitration and insurance valuations
Non-Deductible Capital Fees:
Legal and professional costs for buying or selling property
Fees for first-time lettings exceeding one year
Costs obtaining long leases to replace short ones
Premium-related elements of lease renewals
An interesting distinction exists for civil settlement payments. If you settle allegations that were never proven or admitted, the payment may be deductible. However, if liability was established, only "restitutionary" payments (those compensating the other party for their loss) qualify. Punitive payments functioning like fines are never deductible.
Can I Claim Employee Costs?
Salaries paid to employees who manage your properties are fully deductible, including normal pension contributions. When paying family members, the amount must represent a genuine market rate for work actually performed. You cannot inflate wages beyond commercial levels.
Critically, you cannot deduct anything for your own time spent managing your property business. Only payments to others qualify as deductible employment costs.
If you participate in green energy schemes receiving Renewable Heat Incentive or Feed-in Tariff payments, these technically reduce your energy costs. Only if the payments exceed what you spend on providing the service does the excess become taxable income.
When Can I Claim Travel Expenses?
Whether travel costs qualify depends on where your "business base" is located.
If You Manage Properties from Home:
When you have no office elsewhere and genuinely run your property business from home, travel to your rental properties typically qualifies as business travel. The trips serve your business purpose exclusively.
If You Use a Letting Agent:
Where a letting agent carries out all or virtually all the duties relating to your letting activity, it is likely that the property business is being conducted through the agent. In such circumstances, the business base is likely to be the agent's office, and travelling expenses from your home will not normally be allowable.
The Mileage Allowance Option:
Unincorporated landlords can choose fixed-rate mileage instead of tracking actual costs:
Vehicle Type | Rate per Mile | Notes |
|---|---|---|
Cars and vans | 45p (first 10,000 miles) | Per tax year |
Cars and vans | 25p (over 10,000 miles) | After reaching threshold |
Motorcycles | 24p (all miles) | No threshold applies |
You cannot use mileage rates if you've previously claimed capital allowances on the vehicle, though transitional rules existed for landlords switching between 2017-18 and 2020-21.
What About Unusual Expenses Like Sea Walls?
Some situations require specialised provisions:
Sea Walls and Flood Protection
While capital costs normally aren't deductible, an exception exists for sea walls protecting your let property from flooding by the sea or tidal rivers. Capital expenditure on constructing or extending sea walls can be written off over exactly 21 years as a business expense.
If you spend £63,000 building a sea wall, you deduct £3,000 annually for 21 years. This relief transfers to new owners if you sell the property while it remains in business use.
Interest Rate Hedging
Sophisticated investors using financial instruments like interest rate swaps or caps to manage borrowing costs on deductible loans can treat gains and losses on these hedging tools as property business receipts or expenses.
How Do Bad Debts and Insurance Work?
Landlords using accruals accounting must recognise all earned rent as income, even if tenants haven't paid. When a debt becomes genuinely irrecoverable, you can deduct it. However, debts waived for personal reasons such as forgiving a relative's rent are not deductible. The tenant must genuinely be unable to pay.
General provisions for potential future bad debts aren't allowed. You must identify specific doubtful debts based on facts, not speculation. The exception is large portfolios with extensive historical data supporting statistical reserves.
Insurance premiums protecting your properties, contents, and rental income are deductible. Loss of rent insurance is particularly important, the premiums are deductible, and any payouts are taxable as income. If insurance covers repair costs, only the net amount (repair cost minus recovery) is deductible.
What Happens When Properties Aren't Fully Commercial?
HMRC pools income and expenses across your property business, but strict filters prevent non-commercial activities generating artificial tax losses that reduce tax on commercial profits.
Can I Claim Expenses on Properties Let to Family Below Market Rent?
When you let property below full market rent to a relative for a nominal amount, you fail the "wholly and exclusively" test. The purpose is seen as philanthropic rather than purely business-driven.
The Two-Part Restriction:
Part 1: Break-Even Limit
Expenses are only deductible up to the rent you actually receive. The property can break even for tax purposes but cannot produce a loss.
Part 2: No Carry Forward
Any excess revenue expenses cannot be carried forward to future years or offset against profits from commercially let properties.
Exception for House-Sitting
Genuine short-term house-sitting by relatives between commercial lettings doesn't trigger these restrictions, provided you're actively marketing the property and seeking commercial tenants. A relative staying for one month in a three-year commercial letting pattern is typically acceptable.
Situation | Treatment | Reason |
|---|---|---|
Rent-free to relative | No deductions at all | Outside property income regime |
Below-market rent | Deductions capped at rent received | Partly philanthropic purpose |
House-sitting between lets | Full deductions allowed | Genuinely seeking commercial tenants |
Holiday home used by family | Apportion between commercial and personal use | Mixed purpose requires splitting |
How Do I Handle Properties I Partly Occupy Myself?
When you share a property with tenants or use part of it as a business office while living there, you must split fixed overheads on a fair and reasonable basis. Floor area or number of rooms typically provides the fairest method.
Pay particular attention to exceptional expenditure. If you've lived in a house for many years and recently started letting part of it, a major repair like roof replacement cannot simply be split 50/50. Most of the wear occurred during your years of personal occupation. The deductible business portion must reflect the limited period and extent of business use.
What Special Rules Apply to Lease Premiums?
When landlords grant leases of 50 years or less for lump sum premiums, part of that Lease premium is taxed as rental income rather than capital. To prevent double taxation, tenants using those properties for business or subletting them receive corresponding relief.
How Does Premium Relief Work for Tenants?
The "chargeable amount" the portion on which the landlord paid tax is spread evenly over the lease term as a notional rent deduction for the tenant.
Example: You pay a premium where £10,000 was taxable to your landlord over a 10-year lease. You deduct £1,000 annually as notional rent in addition to actual rent paid. |
This relief is available to whoever currently holds the lease, even if someone else originally paid the premium to the landlord. However, relief doesn't apply to "assignments" lump sums paid to previous tenants to take over existing leases.
What If I Sublet and Charge My Own Premium?
The calculation becomes more complex when you both paid a premium to your landlord and receive one from your subtenant:
Are There Anti-Avoidance Rules I Should Know About?
The framework includes specific protections against artificial arrangements designed to manipulate tax outcomes.
What Are Sale and Leaseback Restrictions?
Anti-avoidance provisions target arrangements involving sales and leasebacks of property. These rules prevent taxpayers from artificially inflating rental deductions to reduce taxable profits.
The Two Main Protections
Commercial Rent Limitation:
Deductions for payments under leasebacks are restricted to what would represent normal commercial rent for similar properties. You cannot artificially inflate lease payments beyond market rates.
Lump Sum Controls:
The rules prevent arrangements where lessees incur disproportionately high rental liabilities for short periods in exchange for lump sum payments (a structure designed to accelerate tax relief artificially).
These provisions ensure sale-leaseback arrangements are genuine commercial transactions rather than tax-avoidance schemes.
How Is Coordination Handled When Multiple Taxpayers Are Involved?
Premium transactions always affect at least two parties: the person paying and the person receiving. Tax charges and reliefs must align between them.
When disagreements arise about taxable amounts, a formal procedure exists. HMRC can issue provisional notices setting out proposed amounts, with 30-day objection rights and standard appeal procedures ensuring fair resolution.
This coordination becomes particularly important when tenants must carry out work affecting property values, or where leases granted at undervalue are subsequently assigned to new tenants.
How Should I Approach Property Deductions?
Success in claiming property expenses correctly rests on three fundamental principles that interconnect throughout the entire framework. The wholly and exclusively test ensures only genuine business costs qualify, requiring honest apportionment when expenses serve dual purposes. The revenue versus capital distinction separates day-to-day running costs from long-term investments, with the functional question. Are you restoring to original condition or creating something better? Finally, the commercial versus non-commercial filter prevents tax relief from subsidising personal arrangements, requiring properties to be let at market rates on normal terms for full deductions.
By maintaining clear records that demonstrate business purpose, commercial intent, and fair apportionment where necessary, you can confidently claim legitimate deductions while remaining within HMRC's guidelines.
