Property Income: Getting Your Rental Profit Calculations Right

A landlord's guide to calculating your rental profit, cash basis vs accruals, capital vs revenue expenses, interest relief, and more.

Cash Basis vs Accruals

If you're a landlord who owns property personally, the rules for calculating your rental profits aren't the same as those for calculating trade profits. Property income calculations are prepared for a tax year, i.e. from 6 April to 5 April.

By default, profits are calculated on a cash basis (income and expenses you have actually received or paid in the tax year), but if your gross rental income (before any expenses are deducted) is over £150,000, you must use the traditional “accruals” method instead.

This means you're taxed on any income or expenses that relate to the tax year, even if you haven't received or paid them yet. If you've paid anything in advance that spans multiple tax years, the cost is spread out across the period, usually on a monthly basis.

Allowable Expenses and Vehicle Costs

Broadly, allowable expenses are those incurred “wholly and exclusively” for your rental business, though there are some specific rules and exceptions relating to property.

Most of the costs that you'd expect are allowable, e.g. management fees, insurance, repairs, decorating, EPCs, gas safety certs, gardening, ground rents, service charges etc.

If you acquire a vehicle that you use for property business purposes, you can either deduct the proportion of actual motor expenses that relate to the business use (including capital allowances), or claim the flat rate mileage allowance (55p for the first 10,000 miles and 25p thereafter). Unless you have a large number of properties that you visit very regularly, the best outcome is usually achieved by choosing the flat rate allowance.

Note: the flat rate doesn't cover incidental expenses like parking or toll charges, so you can claim these too if they relate to the property business. Also note: once you've chosen a method for a specific vehicle, you can't then change to the alternative method, so make sure you choose the right one from the start!

Furnished Holiday Lettings

Until recently, landlords letting qualifying furnished holiday accommodation could benefit from a separate tax regime, with perks such as claiming capital allowances on furnishings, treating profits as relevant UK earnings for pension purposes, and access to certain Capital Gains Tax reliefs on sale.

However, the Furnished Holiday Lettings regime was abolished from 6 April 2025. If you let holiday accommodation, your income and expenses are now taxed under the same rules as any other residential property, and the FHL-specific perks no longer apply!

Capital vs Revenue Expenditure

When calculating your property profits, you need to determine whether your expenses are “revenue” expenses or “capital” expenses. You only get income tax relief on revenue expenses. Capital expenditure is usually something that results in an asset for the business, but for properties, it also includes any expenditure that enhances or improves the property.

Some expenditure is clearly a repair. For example, if a tenant breaks a window and you repair it, this is a genuine repair that can be deducted from rental income. However, if instead of simply repairing a damaged roof, the landlord takes the opportunity to also convert a loft space into an additional room, this is an enhancement or improvement, and would be a capital expense.

As technology develops over time, something that may once have been considered an improvement may come to be seen as a repair. For example, double glazing is now the standard for windows, so if a single-glazed window is replaced with a double-glazed one, the cost is treated as a repair, despite there being an element of improvement.

Repairs to a property after you've bought it, which are needed to make the property suitable for letting, are capital costs.

The cost of providing furnishings and other items in a property is usually a capital cost.

However, the repair or replacement of free-standing white goods (e.g. washing machines, fridges) benefits from “Replacement Domestic Items Relief”, which allows it to be treated as a revenue expense, provided the new item is “substantially the same” as the old one. If the new item is significantly better than the old one, it would be a capital expense. This relief isn't available where rent-a-room relief is being claimed (more on this below!), and no relief is available if the property is used by the taxpayer for part of the year.

Furnished vs Unfurnished Lettings

It's also worth knowing that the old 10% “wear and tear allowance”, which used to let landlords of furnished properties claim a flat deduction each year regardless of what they'd actually spent, was scrapped some years ago. Relief is now only available for actual costs, primarily through the Replacement Domestic Items Relief covered above, so it's important to keep records of what you replace and when, whether the property is let furnished or unfurnished.

Relief for Interest

Many rental properties are purchased using a loan or mortgage. You can get some relief for the interest paid on the loan, provided the loan is wholly and exclusively in relation to the let property and wasn't used for anything else.

Where the property is a commercial property, you can deduct the interest in full from rental profits. However, where it relates to residential property, the interest is only eligible for basic rate tax relief. It isn't deducted from your rental profits; instead, the relief is given as a “tax reducer” after your total tax has been calculated. This has knock-on effects, as it inflates your income for benefits assessments and for your tax and National Insurance bands.

In addition, there's a restriction on how much interest relief you can claim. Relief is available on the lowest of:

• the eligible interest

• the property income for the year less property losses brought forward

• or your adjusted total income.

  
  

This means you can't create a loss or a tax refund as a result of the interest relief. Any unused interest relief does roll forward to future years though, and can be relieved later if your circumstances allow.

Property Business Losses

If your property expenses exceed your property income in a year, you make a property business loss. Profits and losses on all properties are pooled together to create one overall profit or loss. You can carry that loss forward to reduce tax on future property business profits. It can't be used against any other type of income, and can't be carried back against past profits.

Rent-a-Room Relief

If you rent out a room in your home to a tenant, a special relief is available.

You have a choice: either prepare a normal property profit calculation (which is difficult, as you have to apportion household expenses), or deduct a maximum of £7,500 rent-a-room relief from the income received.

The relief applies per property, not per individual, so if a property is owned jointly, each joint owner would claim half the relief.

Note: if rent-a-room relief applies, it doesn't affect the availability of Private Residence Relief when the property is eventually sold.

Joint Ownership and Beneficial Interest

If you own a property jointly with your spouse or civil partner, HMRC's default position is that rental income is split 50/50 between you, regardless of your actual ownership shares.

If your ownership shares are different and you want your tax split to reflect that, you'll need to make a formal election (Form 17), together with evidence of your beneficial ownership shares.

Until that election is made, the 50/50 split applies automatically.

Property Allowance

A property allowance of £1,000 per year is available to individuals with low levels of rental expenses. If your rental income is over £1k and your expenses are less than this amount, it's more beneficial to claim the allowance instead. Note that you can't claim the property allowance if you're claiming rent-a-room relief!

Making Tax Digital for Landlords

Making Tax Digital for Income Tax (MTD) has now come into effect for landlords and sole traders, changing annual Self Assessment into a more frequent, digital-first process.

It became mandatory from 6 April 2026 for anyone with qualifying gross income from property and/or self-employment over £50,000, based on 2024/25 figures.

Instead of one annual return, this means keeping digital records and sending quarterly updates to HMRC, followed by a Final Declaration. The threshold drops to £30,000 from April 2027, and £20,000 from April 2028, bringing many more landlords into scope over the next couple of years.

If you're anywhere near these thresholds, it's well worth getting your digital record-keeping in order now, ahead of when it becomes compulsory for you.

Get It Right From the Start

Property tax rules like these are easy to get wrong, and the cost of getting them wrong, whether that's overpaying tax or missing a claim you're entitled to, can add up quickly.

If you're a landlord and want to make sure your rental profits are calculated correctly and you're claiming everything you're entitled to, get in touch — I'd love to help you get your numbers right.

This blog is for general information purposes only and does not constitute professional advice. Zenith Digital Accountants Ltd accept no liability for any loss arising from reliance on its content — please seek tailored advice before making decisions