How property income is taxed, and what changes the bill
Rental profit is taxed as income, and the tax is calculated on a figure that is not the same as the cash in your hand.
Rental income is taxed as property income, added to your other income and charged at your marginal rate. The taxable figure is the rent received minus allowable expenses, and the gap between that figure and the cash actually available is where most landlords are surprised.
The rules change, so the figures below should be confirmed. What does not change is the principle that the taxable profit is not the same as the cash flow.
Allowable expenses
These reduce the taxable profit and must be revenue rather than capital in nature.
- Letting agent fees, including tenant find and management
- Repairs and maintenance, but not improvements
- Insurance, ground rent and service charge
- Council tax and utilities where the landlord pays them
- Accountancy fees and professional costs
- Replacement of domestic items such as furniture and appliances, under the replacement of domestic items relief
- Mortgage interest is not deducted — it attracts a 20% tax credit instead
Capital versus revenue
The distinction between a repair and an improvement matters, because a repair is deductible and an improvement is not. Replacing a broken boiler is a repair; installing a new heating system with additional radiators is arguably an improvement.
Capital expenditure can be reflected in the capital gains calculation when the property is sold, so it is not lost — it is deferred. Keeping records of capital spend is therefore essential, because the paperwork is what supports the claim years later.
The structural question
Whether the property is held personally or through a company changes the tax treatment materially, particularly for mortgage interest. A company can deduct interest; an individual cannot, receiving a 20% credit instead.
The decision depends on your tax position, whether you will reinvest or spend the profit, and the cost of moving existing property into a company. It is a calculation to do with an accountant who can see the whole position, not a general rule.
Common questions
- What expenses can I claim against rental income?
- Letting agent fees, repairs and maintenance, insurance, ground rent, service charge, council tax and utilities where you pay them, accountancy fees, and replacement of domestic items. Improvements are not deductible against income but can be reflected in the capital gains calculation. Mortgage interest is not deductible for individuals — it attracts a 20% credit.
- Is it better to hold rental property personally or in a company?
- It depends on your tax position and your intentions. A company can deduct mortgage interest and pays corporation tax, which suits a higher-rate taxpayer reinvesting the profit. An individual receives a 20% credit for interest instead. Moving existing property into a company triggers capital gains tax and stamp duty, so the decision is much cheaper to make before buying.