What Counts as a Landlord Expense in Your Q1 MTD Quarterly Update

Why Getting Your Expenses Right Matters in Every Quarterly Update

Your quarterly update is not your final tax return. You are not locking in every figure for good. But the expenses you record each quarter build the foundation for what HMRC sees when your final declaration is submitted. Get into bad habits in Q1, and you will be untangling them all year. Get it right from the start, and each quarterly update becomes straightforward.

This post is specifically for landlords filing property income through Making Tax Digital (MTD). It covers which expenses are allowable in your quarterly update, which are not, and what to do when you are not sure. We will work through real scenarios - repairs versus improvements, insurance, council tax, utilities, letting agent fees, and mortgage interest - so you can make confident decisions rather than guessing.

If you are new to MTD generally, our complete landlord guide covers the basics. This post assumes you are already filing and want to know exactly what to put where.

The Basic Rule: Allowable Expenses Must Be "Wholly and Exclusively" for Your Property Business

HMRC allows you to deduct expenses that are incurred wholly and exclusively for the purpose of your rental business. That phrase matters. It means personal costs do not count, and mixed-use costs need to be split carefully.

For landlords, your "property business" means the letting of residential or commercial property. If you own a buy-to-let flat, the costs of running that flat as a rental are your business costs. Your own mortgage on your home, your personal phone bill, or your personal car insurance are not.

This is not the place for guesswork. If you are unsure whether a cost qualifies, note it down separately and review it before your final declaration. The quarterly update can be amended if you need to correct something - see our guide on amending your Q1 update before the deadline.

Repairs vs Improvements: The Most Common Landlord Confusion

This catches out more landlords than almost anything else. The rule is:

• Repairs are allowable. A repair restores something to its original condition without improving it beyond what it was.
• Improvements are not allowable as revenue expenses. They may qualify for capital allowances or other treatment at the end of the year, but they do not go into your quarterly update as routine expenses.

Concrete examples of repairs (allowable)

• Replacing a broken boiler with an equivalent modern one
• Fixing a leaking roof using the same materials
• Repainting the interior after normal wear and tear
• Replacing a cracked window like-for-like
• Repairing a broken fence panel
• Replacing worn carpet with a similar quality carpet

Concrete examples of improvements (not allowable as expenses)

• Converting a loft into a bedroom
• Adding a conservatory or extension
• Upgrading a standard kitchen to a high-end fitted kitchen
• Replacing single-glazed windows throughout with double-glazing for the first time
• Installing a new bathroom where there was none before

The grey area: like-for-like replacements with a modern equivalent

If you replace a broken storage heater with a modern equivalent, that is generally a repair. If you replace an old heating system with underfloor heating throughout, that is an improvement. The test is whether you are broadly restoring what was there, or significantly enhancing the property.

When you are genuinely unsure, keep the invoice, note the original condition, and flag it for review. Do not simply leave it out - if it is legitimately a repair, you do not want to miss the deduction.

Insurance Premiums

Buildings insurance and landlord-specific insurance policies are allowable expenses. These cover costs that arise directly from letting the property.

Allowable insurance types

• Buildings insurance for the rental property
• Landlord liability insurance
• Rent guarantee insurance (covers you if a tenant does not pay)
• Landlord contents insurance for items you own in a furnished let

Not allowable

• Your personal life insurance
• Insurance on your own home (unless you are renting part of it out - in which case you would need to apportion the cost)
• Income protection insurance for your other employment - that relates to your employment, not your property business

If you pay your buildings insurance annually, you can include the full annual premium in the quarter it was paid. Alternatively, you can spread it across quarters. Either approach works, but be consistent and make sure you are not claiming the same premium twice across different quarters.

Council Tax

This one is straightforward in most cases. Council tax is only allowable if you are paying it as the landlord, not the tenant.

When you can claim it

• The property is empty between tenancies and you are covering the council tax during that period
• Your tenancy agreement states that you pay council tax (unusual, but it happens)
• The property is a Houses in Multiple Occupation (HMO) where you as the landlord are responsible for council tax

When you cannot claim it

• The tenant is liable for council tax and pays it directly - this is the default arrangement in most standard tenancies
• You are paying council tax on your own home

If a property is empty for a period and you are paying council tax on it, keep a clear record of the dates and the bills. Empty periods also affect your rental income figures, so make sure your income reconciliation reflects this accurately.

Utilities

The same principle applies: you can only claim utilities you are actually paying as the landlord.

Allowable

• Gas, electricity, or water bills for the property during void (empty) periods when you are paying them
• Utilities you pay as part of the tenancy agreement (again, unusual in standard lets but common in HMOs or serviced accommodation)
• Communal area utilities in a block you manage

Not allowable

• Utilities in your own home, even if you occasionally use that space to do admin for your property
• Tenant-paid utilities - if the tenant pays the gas bill, it is not your expense to claim

If you run your property business partly from home, you might be tempted to claim a portion of your home utilities. HMRC does allow a proportion of genuine home-as-office costs for self-employed people, but for property income specifically this is a complex area. Note any such costs separately and take advice before including them. They are not routine quarterly update entries.

Letting Agent Fees

Letting agent fees are fully allowable and one of the cleaner expenses to record. Whether you use an agent for tenant-find only, rent collection, or full management, the fees you pay are deductible against your rental income.

What counts

• Monthly management fees (usually a percentage of rent)
• Tenant-find fees, including advertising costs the agent charges you
• Inventory fees charged by the agent
• Check-in and check-out fees
• Renewal fees for tenancy extensions

What does not count

• Fees for services that relate to buying or selling the property (these are capital costs, not revenue expenses)
• Legal costs for acquiring the property

Keep your agent statements or invoices. These make records straightforward and are exactly the kind of evidence HMRC would expect to see if they ever asked questions about your rental income records.

Mortgage Interest

This is where many landlords get confused because the rules changed significantly and are now different from other expenses.

You cannot deduct mortgage interest as a straightforward expense the way you used to. Since April 2020, the old system of deducting mortgage interest from rental income was phased out completely. Instead, you get a basic rate tax credit worth 20% of your mortgage interest payments. This is applied at the end of the year through your final declaration - not directly as an expense in your quarterly update.

What this means for your quarterly update

You still need to record your mortgage interest payments each quarter. In AffordableMTD, this goes into a specific category - typically labelled as "finance costs" or "loan interest" - rather than general expenses. It is tracked separately because HMRC treats it differently at calculation time.

Do not leave mortgage interest out of your records. It still reduces your tax liability through the credit mechanism. It just does not appear as a deductible expense in the same way as, say, your letting agent fees.

Other Allowable Expenses Worth Knowing About

Beyond the main categories above, the following costs are also allowable for landlords in their quarterly updates:

Professional fees

• Accountant fees for preparing your property accounts or tax return
• Legal fees for renewing a lease or dealing with a rent dispute
• Legal fees for evicting a tenant (allowable because it relates to maintaining your rental income)

Legal fees for buying or selling a property are capital costs and not allowable as quarterly expenses.

Advertising costs

If you advertise your property directly (rather than through an agent), the cost of the adverts - whether on a property portal, in a local paper, or elsewhere - is allowable.

Ground rent and service charges

If you own a leasehold property and pay ground rent or service charges, these are allowable expenses. Keep the invoices or statements from the freeholder.

Furniture replacement (Replacement of Domestic Items Relief)

If you let a furnished property and replace an item of furniture, you can claim the cost of the replacement under Replacement of Domestic Items Relief. This applies to items like sofas, beds, curtains, and white goods. The initial cost of furnishing a property when first let is not allowable under this relief - only replacements are.

This relief is for the like-for-like replacement cost. If you upgrade - for example, replacing a basic sofa with a premium one - you can only claim the cost of an equivalent basic replacement, not the full upgrade cost.

What You Cannot Claim in Your Quarterly Update

To be clear, here is a short list of costs landlords sometimes try to include that are not allowable:

• The capital portion of your mortgage repayments (you are only tracking the interest, not repayments of the loan itself)
• Depreciation of the property itself
• Your own time spent managing the property (you cannot pay yourself a wage from a property business in this way)
• Private expenses of any kind
• Costs of improving the property (as covered above)
• Penalties or fines (HMRC does not allow tax or regulatory fines as deductions)

Keeping Records to Support Your Expenses

Every expense you enter into your quarterly update needs to be backed by a record. This does not mean you send the records to HMRC with every update - you keep them yourself in case you are ever asked. HMRC can request records for up to several years after filing.

For each expense, you should have:

• The date of the transaction
• The amount paid
• What it was for
• Proof of payment (a receipt, invoice, bank statement entry, or agent statement)

Our post on HMRC record-keeping standards for MTD covers exactly what you need to keep and for how long. If your Q1 records are already messy, this practical guide to fixing messy expense records is worth reading before your deadline.

What If You Are Still Not Sure Whether an Expense Qualifies?

Do not guess and do not just leave it out. If you are genuinely unsure:

1. Record the expense with a clear description of what it was.
2. Keep the receipt or invoice.
3. Flag it for review before your final declaration - that is the point at which all the adjustments and corrections happen.

Your quarterly update figures are not set in stone. You can amend them - see how to correct a submitted Q1 MTD update if you need to make changes. And when it comes to allowances and adjustments, our post on Q1 allowances and adjustments covers what else you might be able to claim at year end.

For a broader look at what counts as an allowable expense across different income types, see our main allowable expenses guide for MTD.

Pulling It Together for Your Quarterly Update

Getting landlord allowable expenses right in your quarterly update comes down to a few consistent habits. Record expenses promptly. Keep the receipts. Know the difference between repairs and improvements. Track mortgage interest separately. And when something does not fit neatly into a category, note it clearly rather than forcing it somewhere wrong.

The quarterly update is your opportunity to build an accurate picture of your property income and costs throughout the year - not just scramble at year end. The more carefully you categorise each quarter, the less correcting you will need to do when your final declaration comes around.