Landlords' guide to rental income and tax

You’re taxed on profit, not rent

The single most useful thing to understand as a landlord is that you’re taxed on your profit — your rental income minus your allowable expenses — not on your gross rent. The expenses you can legitimately claim are therefore the difference between a sensible tax bill and an unnecessarily large one.

What you can claim

Allowable expenses are the costs incurred wholly and exclusively for the purpose of letting the property. Common ones include:

• Letting agent fees and marketing costs
• Repairs and maintenance (note: repairs, not improvements — improvements are capital, with different rules)
• Buildings and contents insurance
• Ground rent, service charges and utility bills you pay
• Council tax on empty periods
• Accountancy fees for preparing your landlord tax return
• Interest on a loan or mortgage taken out to buy the property (see below)

A note on mortgage interest

The days of full mortgage interest relief are gone for individual landlords. Since 2020, mortgage interest is treated as a tax credit at the basic rate, rather than an expense deducted from your income. The practical effect is that higher-rate taxpayers can’t reduce their tax bill the way they once could — so structuring your property business matters more than ever.

Trading vs property business — a crucial difference

If you buy, renovate and sell property with the intention of making a profit, you may be treated as trading rather than running a property business — with very different tax consequences, including Income Tax on profits and potential Business Asset Disposal Relief issues. Understanding which category you fall into is essential before you start.

Record keeping

Keep every receipt, invoice and bank statement relating to your rental properties, ideally separated from personal finances. If you’re within the scope of Making Tax Digital for Income Tax, your records will need to be digital too — see our article on MTD for Income Tax.

The property allowance

If your gross rental income is under £1,000 a year, you may not owe any tax on it at all thanks to the property allowance. If it’s only slightly above, the allowance can still simplify your calculation. It doesn’t apply alongside actual expenses — you pick whichever gives the better result.

Getting it right

Property is one of the areas where HMRC scrutiny is increasing — inaccurate expense claims and undisclosed rental income are both firmly on their radar. We help landlords across London and Hertfordshire stay compliant while keeping their tax efficient.

If you’re a landlord — new or experienced — book a free consultation.