Landlord Expenses in MTD: Which Ones Count (And Why)

Why Landlord Expenses Are Harder to Get Right Than Most People Think

Knowing you can claim expenses against your rental income is one thing. Knowing which expenses qualify - and how to categorise them correctly in your MTD quarterly update - is where most landlords run into trouble. The confusion is not usually about obscure rules. It is about a handful of specific costs that sit in genuinely grey areas: service charges, ground rent, mortgage interest, repair bills, and furnished holiday let running costs. Get these wrong and you are either leaving money on the table or filing something HMRC may challenge later. This guide works through each one, with real examples and the HMRC rules that apply.

If you are new to Making Tax Digital and want a broader overview first, start with our complete guide to MTD for landlords. Come back here once you want the detail on specific expense categories.

1. Service Charges: Usually Allowable, But Not Always

If you own a leasehold property - a flat, for example - you will almost certainly pay a service charge to the freeholder or managing agent. This covers things like building maintenance, communal cleaning, and building insurance. In most cases, service charges are an allowable expense against your rental income.

The key test is whether the charge is for the day-to-day running and upkeep of the building. If it is, you can claim it. Record it under property management costs or maintenance costs in your quarterly update.

Where it gets complicated

Some service charges include a reserve fund contribution - sometimes called a sinking fund. This is money held back to pay for major future works, like a roof replacement. HMRC's position is that you cannot claim a reserve fund contribution as an expense until the money is actually spent on qualifying works. Simply paying into the fund is not enough. You claim the expense when the works happen, not when you contribute.

What this means in practice: if your annual service charge is £1,800 and £400 of that is a reserve fund contribution, you can claim £1,400 now. The £400 sits in limbo until the fund is used on works that would themselves qualify as repairs (more on that distinction below).

2. Ground Rent: A Simple Rule With One Catch

Ground rent is a payment made by a leaseholder to the freeholder, typically an annual fixed amount. It is an allowable expense against rental income and you can claim it in the quarter it is paid.

The catch is mostly practical rather than legal. Since the Leasehold Reform (Ground Rent) Act 2022 came into force, ground rent on new residential leases granted after 30 June 2022 is legally capped at zero (a "peppercorn"). So if you bought a new-build flat recently, you may not actually be paying ground rent at all. Check your lease. If you are paying it under a pre-2022 lease, it remains allowable.

For your MTD records, keep the annual demand notice from the freeholder as your supporting evidence. That is the document HMRC would want to see if they asked.

3. Mortgage Interest: Allowable, But Not How You Might Expect

This is probably the most misunderstood area for landlords who are new to the rules. Many people assume they can deduct their full mortgage payment from their rental income. You cannot.

You cannot claim mortgage payments as an expense. What you can claim is tax relief on mortgage interest - and only the interest portion, not the capital repayment part of each payment. Even then, the relief does not reduce your rental income directly. Instead, it gives you a tax credit worth 20% of the qualifying interest, applied when you complete your final declaration at the end of the tax year.

What this looks like in your quarterly update

For your quarterly update, you record your rental income and your allowable expenses. Mortgage interest does not go in as a deductible expense in the traditional sense - it is handled separately as a finance cost. HMRC calls the mechanism a "basic rate tax reduction" under Section 24 of the Finance Act 2015.

In practical terms, this means a higher-rate taxpayer who assumes they are reducing their rental profit by the full mortgage interest amount will be in for a shock at year end. The relief is fixed at 20%, regardless of whether you pay 40% or 45% tax.

What counts as qualifying interest?

Interest on a mortgage used to buy a rental property qualifies. So does interest on a loan used to fund improvements to that property. What does not qualify is interest on personal borrowing that you have redirected toward property expenses - HMRC looks at what the loan was originally for, not how you spent the money later.

Keep your annual mortgage statement as your evidence. It will show how much of each payment was interest and how much was capital.

4. Repairs vs Capital Works: The Line That Matters Most

This is the category that causes the most genuine confusion, and the one where landlords are most likely to make a costly mistake in either direction.

The rule is this: repairs are allowable expenses; capital improvements are not (at least not in the same way). The distinction turns on whether the work restores something to its original condition or improves it beyond what it was before.

What counts as a repair

• Fixing a broken boiler
• Repointing brickwork that has deteriorated
• Replacing a broken window with a like-for-like equivalent
• Repainting interior walls after tenant damage
• Replacing worn carpet with a similar-quality carpet

What counts as capital improvement

• Adding an extension or conservatory
• Converting a loft into a bedroom
• Replacing a basic kitchen with a significantly upgraded one
• Installing central heating where there was none before

Capital improvements cannot be claimed as a running expense. They may instead reduce the capital gain when you eventually sell the property - but that is a different calculation at a different point in time.

The grey area: replacements

Replacing something that was there before gets complicated. Replacing single-glazed windows with double-glazed windows: is that a repair or an improvement? HMRC's general position is that if you are replacing like with like at the standard available in the current market - and double-glazing is now the standard - it can be treated as a repair. Replacing aluminium-framed windows with bespoke hardwood-framed ones would be harder to argue as a straight repair.

Our dedicated post on repairs vs capital works in MTD covers the most common borderline cases with specific HMRC guidance references.

What records do you need?

For repairs, keep the invoice or receipt from the contractor. Make sure it describes the work done - "maintenance works" is vague and unhelpful if HMRC asks for details. "Replacement of failed boiler heat exchanger" is clear. If you paid a builder in cash (legal, though inadvisable), ask for a written receipt with their name, the address of the property, and a description of the work.

5. Furnished Holiday Let Costs: Different Rules Apply

If you let a property as a furnished holiday let (FHL), different tax rules apply compared to a standard buy-to-let. This affects which expenses you can claim and how.

To qualify as a furnished holiday let, a property must meet three annual tests set by HMRC:

1. It must be available for commercial letting for at least 210 days in the tax year.
2. It must actually be let commercially for at least 105 days.
3. No single letting to the same person can exceed 31 consecutive days for more than 155 days in total.

If your property meets these tests, it is treated more like a trade than a passive investment for tax purposes. That opens up some significant benefits.

Additional expenses FHL landlords can claim

• Furniture and equipment replacement - FHL landlords can claim capital allowances on furniture, fixtures, and equipment. This is broader than the standard property income rules.
• Costs of furnishing the property - The initial cost of furnishing can qualify for capital allowances rather than being a non-deductible capital cost.
• Advertising and booking platform fees - Fees paid to platforms to list your property are allowable in both FHL and standard lets, but in an FHL context where the activity is more intensive, these costs tend to be higher and are worth tracking carefully.
• Cleaning and changeover costs - Costs of cleaning between guests are allowable revenue expenses.

What this means for your MTD quarterly updates

If you are filing for 2025-26 or later, your former FHL property is now reported under standard property income rules. That means the capital allowance benefits no longer apply in the same way. You can still claim the replacement of domestic items relief for furnished properties - but the broader capital allowance treatment that FHL attracted is gone. Record your expenses carefully and use the correct categories for the tax year you are filing.

6. Expenses That Landlords Often Miss

Beyond the five categories above, there are several costs that landlords either forget to claim or are unsure about.

Letting agent fees

Management fees charged by a letting agent are fully allowable. This includes fees for finding tenants, tenant referencing, and ongoing management. The invoices from your agent are your evidence - keep them.

Accountancy fees (if applicable)

If you pay an accountant to prepare your property accounts or help with your tax return, that fee is an allowable expense against your rental income. If the same accountant also handles your self-employment affairs, you may need to apportion the fee.

Insurance premiums

Landlord insurance - covering buildings, contents, and liability - is an allowable expense. Standard home insurance on a property you also live in would need to be apportioned if you are letting part of it.

Council tax and utility bills

If you pay council tax or utility bills during a void period (when the property is empty between tenancies), these are allowable expenses for that period. If your tenant pays their own bills, you cannot claim them.

Legal fees

Legal fees for renewing a lease of less than 50 years, or for eviction proceedings, are generally allowable. Legal fees for the original purchase of the property are not - those are capital costs.

For a broader look at how to categorise expenses correctly across both property and self-employment income, see our post on mixed income MTD expenses.

Keeping the Evidence HMRC Expects

For each expense you claim, you need a document that confirms what you paid, who you paid it to, and what it was for. Bank statements alone are not sufficient - HMRC expects to see the underlying invoice or receipt too.

For regular quarterly costs like service charges, ground rent, and agent fees, set up a simple folder system (physical or digital) and file each invoice as it arrives. Doing this in the same week you receive it takes two minutes. Hunting for a year's worth of invoices in July takes considerably longer.

Our post on what proof HMRC needs for MTD expenses covers the exact evidence standards for each cost type.

Getting the Categories Right in Your Quarterly Update

When you file a quarterly update through MTD, your expenses are grouped into categories. Using the wrong category does not automatically trigger a penalty, but it does affect how your income and profit appear across the year. Consistent miscategorisation can also create problems when you come to complete your final declaration at year end.

The main property expense categories you will encounter are:

• Premises costs (insurance, ground rent, service charges)
• Repairs and maintenance
• Financial costs (mortgage interest, loan interest)
• Professional fees (accountant, solicitor)
• Cost of services (including letting agent fees)
• Other allowable property expenses

If you are unsure where something fits, our post on common MTD expense miscategories works through the most frequent categorisation mistakes and how to fix them.

Putting It Together

The expenses that trip landlords up in MTD are not usually exotic or unusual. They are the everyday costs - service charges, mortgage payments, repair bills - where the rules are specific enough to matter. Service charges with reserve funds need splitting. Mortgage interest gives a tax credit rather than a direct deduction. Repairs must be distinguished from improvements. FHL rules have changed significantly from 2025-26. Getting these right from the start of each quarter means your quarterly updates reflect your real position accurately, and you have the evidence in place if HMRC ever asks.