Non-allowable expenses

Non-allowable expenses are costs a landlord incurs in connection with a rental property that cannot be deducted from rental income when calculating taxable profit. Under HMRC's Property Income Manual (PIM2005), the test for any deduction is whether the cost was incurred "wholly and exclusively" for the purposes of the property business and is not capital in nature. A cost that fails either part of that test is non-allowable against rental income, though capital costs may provide relief at a later stage through Capital Gains Tax. Non-allowable expenses are the direct counterpart to allowable expenses, which are deductible running costs.

Capital expenditure

Capital expenditure is the most significant and most commonly misunderstood category of non-allowable expense. Under ITTOIA 2005 Part 3, capital costs cannot be deducted from rental income in the year they are incurred. The distinction HMRC draws is between work that restores a property to its existing condition (a repair - allowable) and work that improves, extends, or enhances it beyond its previous state (capital, not immediately deductible).

The capital/revenue distinction applies directly to capital improvements, works that enhance rather than maintain, such as extensions, conversions, or structural alterations. A like-for-like boiler replacement is a repair. Installing underfloor heating where there was none is capital. Fitting a new kitchen that is materially better than the one it replaces is capital. The cost of upgrading to meet energy efficiency requirements under MEES may be capital where the work goes beyond restoring the existing standard.

Non-allowable capital costs are not permanently lost. They are added to the property's base cost for Capital Gains Tax purposes, reducing the taxable gain when the property is eventually sold. Landlords who spend £20,000 on an extension that is non-deductible against rental income will in effect recoup the tax relief when they sell, provided the gain on disposal is above the base cost including that improvement.

Initial purchase costs

The entire cost of acquiring a property, including purchase price, Stamp Duty Land Tax, legal and conveyancing fees, survey costs, and auction fees, is capital expenditure and cannot be deducted from rental income. These costs form part of the property's base cost for CGT but provide no immediate income tax relief. HMRC's Property Income Manual (PIM2120) confirms that legal costs incurred in acquiring or adding to a property are non-allowable against rental income.

Personal and mixed-use costs

The "wholly and exclusively" rule disallows any private or personal element within a cost. A landlord who uses a personal vehicle partly for property management and partly for private journeys can only claim the proportion attributable to property business use. The same principle applies to phone bills, home office costs, travel, and any other cost that serves both private and business purposes.

Where a property itself has a dual use, for example, a holiday cottage that the landlord also uses personally, only the proportion of costs relating to the letting period is allowable. Costs incurred during personal occupation are non-allowable.

Mortgage capital repayment and the Section 24 restriction

The capital repayment element of a buy-to-let mortgage has never been an allowable expense. It represents the reduction of a loan liability, not a cost of running the rental business. Only the interest element is relevant to the income tax calculation, and even that is subject to the mortgage interest restriction under Section 24 of the Finance Act 2015, which is the most consequential tax change for individual landlords in the past decade, and means the treatment of financing costs is more complex than it was before 2017.

Since April 2020, individual landlords cannot deduct mortgage interest from rental income to reduce their taxable profit. Instead, they receive a basic-rate (20%) tax credit on finance costs. This means a higher-rate taxpayer no longer receives full relief on interest payments, the restriction effectively makes a proportion of what was previously deductible a non-allowable cost for the purposes of profit calculation.

Fines, penalties, and certain legal costs

Fines and financial penalties, including civil penalty notices issued for regulatory breaches, are not deductible against rental income. HMRC takes the position that allowing deductions for penalties would undermine their deterrent effect. Penalties imposed by the First-tier Tribunal, local authorities, or Trading Standards cannot be offset against rental profits regardless of the circumstances of the breach.

Legal costs that relate to acquiring property, renewing leases on non-normal terms, or pursuing debts of a capital nature are similarly non-allowable under PIM2120. By contrast, legal costs relating to the management of the letting business, such as evicting a tenant to relet the property, are allowable.

Landlords using August's expenses tracking feature can tag each cost as capital or revenue at the point of entry, making Self Assessment reconciliation straightforward and reducing the risk of claiming non-allowable items.

For a practical guide to categorising every cost in a rental business, with worked examples of the capital/revenue split and the Section 24 interaction, see our landlord guide to rental property expense categorisation.

Frequently asked questions

If capital costs are non-allowable, are they wasted?

No. Capital costs that cannot be deducted from rental income are added to the property's base cost for Capital Gains Tax. When the property is sold, the gain is calculated as sale proceeds minus base cost (including allowable capital expenditure). A larger base cost means a smaller taxable gain and therefore less CGT. The relief is deferred rather than lost.

Is the full mortgage payment non-allowable?

Only the capital repayment element is non-allowable in all cases. The interest element was historically allowable in full, but since the Section 24 restriction was fully phased in from April 2020, individual landlords can no longer deduct mortgage interest from rental income. They instead receive a 20% tax credit on finance costs. Limited companies are not subject to the Section 24 restriction and can deduct mortgage interest as a business expense before Corporation Tax.

Are improvements for energy efficiency non-allowable?

It depends on the nature of the work. Replacing an existing boiler with a modern equivalent of the same type is a repair, allowable. Installing an air source heat pump where there was previously a gas boiler constitutes a capital improvement, non-allowable against rental income but added to base cost for CGT. Where new regulations require energy efficiency works, the distinction between maintaining the existing standard (revenue) and upgrading to a new standard (capital) must be applied to each specific project.