Service Charges and Ground Rent: What Landlords Can Claim in MTD

The Expenses Most Landlords Get Wrong

Service charges and ground rent appear on thousands of landlords' annual statements - and thousands of landlords either forget to claim them, lump them in the wrong expense category, or assume they are not allowable at all. Under Making Tax Digital (MTD), you report expenses every quarter, which means these mistakes get repeated four times a year before anyone notices. This post explains exactly what you can claim, what you cannot, how to categorise each item correctly in your MTD quarterly update, and the common pitfalls that leave real money unclaimed.

A Quick Word on How MTD Works for Landlords

Under MTD for Income Tax, landlords with qualifying income above the threshold must submit quarterly updates to HMRC through recognised software. Each update reports your rental income and expenses for that quarter. Nothing is finalised until your end-of-year declaration, but the quarterly figures feed directly into your tax position.

That means categorising expenses correctly from the start matters. If you misplace a service charge or omit ground rent for four quarters running, you will either need to amend those updates after filing or catch the error at year-end - neither is ideal. Getting it right in real time is far simpler.

If you are still working out whether MTD applies to you, start with Do I Need to File Making Tax Digital for Income Tax?

Service Charges: What They Are and Whether You Can Claim Them

What a service charge actually is

If you own a leasehold flat or a property within a managed building or estate, your lease will usually require you to pay a service charge. This is a contribution to the cost of maintaining shared areas - things like cleaning communal hallways, maintaining lifts, insuring the building, or repairing the roof.

Service charges can be fixed or variable. Variable service charges change each year depending on what work was done. You may also be asked to pay into a reserve fund (sometimes called a sinking fund) to cover future major works.

Are service charges an allowable expense?

Yes - with conditions. HMRC allows service charges as an expense for landlords where the charge relates to the ongoing management and upkeep of the property you rent out. The key test is whether the expense is incurred wholly and exclusively for the purposes of your rental business.

Routine service charges that cover maintenance, cleaning, gardening of communal areas, building insurance (where included in the service charge), and property management costs are allowable.

What about sinking fund contributions?

This is where it gets nuanced. Regular contributions to a sinking fund are not automatically allowable when you pay them. HMRC's position is that you cannot claim relief for money held in reserve for future repairs - you can only claim when the expenditure is actually incurred on an allowable repair.

In practice, this means:

• Routine service charge payments - allowable in the quarter you pay them
• Sinking fund contributions held in reserve - not allowable until spent on qualifying repairs
• One-off major works billed through the service charge (a repair, not an improvement) - allowable in the quarter billed, subject to the capital/revenue distinction below

Ground Rent: What It Is and Whether You Can Claim It

What ground rent is

Ground rent is a charge paid by a leaseholder to the freeholder (the person who owns the land beneath the building). If you own a leasehold property - common with flats - your lease may require you to pay ground rent annually or more frequently.

Since the Leasehold Reform (Ground Rent) Act 2022, ground rent on new residential leases in England and Wales cannot exceed a peppercorn (effectively zero). But many existing leases still carry ground rent obligations, and those landlords continue to pay them.

Is ground rent allowable?

Yes. Ground rent on a leasehold property you let out is an allowable expense. It is a cost you incur as part of holding and renting the property, and HMRC accepts it as a deductible expense against your rental income.

This applies whether the ground rent is a small fixed amount or a larger escalating charge under an older lease. Claim it in the quarter you pay it.

What Else Falls Into This Category

Freeholder charges and estate management fees

Some landlords own freehold properties that are part of a managed estate - a housing development with shared roads, landscaping, or communal facilities. In that case, you may pay estate management fees to a residents' management company or a private estate manager. These are treated similarly to service charges and are allowable where they cover ongoing maintenance and management of shared areas.

Managing agent fees

If you use a letting agent to manage your property, their fees are allowable. This includes:

• Ongoing management fees (typically a percentage of rent collected)
• Tenant-finding fees
• Renewal fees charged by the agent
• Fees for rent collection, inventory management, and routine inspections

These are straightforward allowable expenses and should be categorised under property management or agent fees in your MTD software. For more detail on the full range of allowable landlord expenses, see Allowable Expenses for MTD: What You Can Claim as a Sole Trader or Landlord.

Buildings insurance (where not included in service charge)

If you pay buildings insurance separately - rather than through your service charge - that is also allowable. Contents insurance for furnished lettings is allowable too. These should be categorised under insurance in your MTD quarterly update.

What You Cannot Claim: Common Mistakes

Mortgage interest

Mortgage interest is no longer a straightforward allowable expense for residential landlords. Since April 2020, the mortgage interest deduction was replaced by a tax credit at the basic rate. This means it does not go in your expenses column at all - it is handled separately as a finance cost when you complete your end-of-year figures. Do not include mortgage interest payments in your quarterly expense updates.

Capital improvements

As mentioned above, work that improves a property beyond its original state is a capital expense, not a revenue expense. Capital expenses cannot be claimed in your quarterly updates. Examples include:

• Adding an extension or conservatory
• Converting a loft or garage
• Upgrading a standard kitchen to a significantly higher specification
• Installing central heating where there was none before

Capital improvements may be relevant when calculating Capital Gains Tax if you sell the property, but they do not reduce your rental income tax liability in the year they occur.

Personal use costs

If you also use the property personally - a holiday let that you stay in yourself, for example - you cannot claim the full cost of service charges and ground rent. You can only claim the proportion that relates to the letting period. The rules around this overlap with Mixed-Use Expenses and MTD: Claiming the Business Percentage.

Depreciation

You cannot claim depreciation as an expense. If you let furnished accommodation, you can claim a replacement of domestic items relief instead, but that is separate from service charges or ground rent.

How to Categorise These Correctly in Your MTD Quarterly Update

HMRC's property income categories in MTD are broader than many landlords expect. You will typically see these expense headings when filing through MTD-compatible software:

• Premiums paid for the grant of a lease - not relevant here
• Rent, rates, insurance, ground rents - this is where ground rent and buildings insurance go
• Property repairs and maintenance - for allowable repair-related service charge costs
• Non-residential property finance costs - not relevant for residential landlords
• Legal, management and other professional fees - for managing agent fees and letting agent fees
• Other allowable property expenses - a catch-all for costs that do not fit neatly elsewhere

For most landlords:

• Ground rent goes under Rent, rates, insurance, ground rents
• Routine service charges (maintenance element) go under Property repairs and maintenance
• Service charges that cover insurance go under Rent, rates, insurance, ground rents
• Managing agent fees go under Legal, management and other professional fees

If your service charge covers several things in one bill, it is worth splitting the amount across categories where you know the breakdown. If you only have a total figure and no breakdown, use Other allowable property expenses and keep the original statement as your supporting record.

Worked Examples

Example 1: Leasehold flat let to a tenant

Sarah owns a leasehold flat in Manchester. She pays £1,200 per year in service charges (covering communal cleaning, building insurance, and general maintenance) and £250 per year in ground rent. She uses a letting agent who charges 10% of rent collected.

In her MTD quarterly update for Q1 (April to June), she received £4,800 rent and paid:

• £300 service charge (Q1 portion of annual charge) - allowable, split across repairs/maintenance and insurance
• £250 ground rent (paid annually in April) - allowable under rent, rates, insurance, ground rents
• £480 letting agent fee (10% of £4,800) - allowable under legal, management and other professional fees

Total allowable expenses in Q1: £1,030. She can claim all of these.

Example 2: Service charge including major works

James owns a leasehold flat in Bristol. His managing agent issues a special service charge invoice for £3,500 to cover his share of replacing the building's fire doors - a like-for-like repair required under fire safety regulations.

This is a repair (replacing something with an equivalent), not an improvement. It is allowable. James claims it under Property repairs and maintenance in the quarter it is invoiced.

If the same works had involved upgrading all fire doors to a significantly higher specification than previously installed, HMRC might consider part of that cost capital expenditure. James would need to check the details and potentially only claim the repair portion.

Example 3: Sinking fund contribution

Priya pays £600 per year into her building's sinking fund, held in reserve for future roof works. The roof has not been touched yet.

She cannot claim the £600 as an expense this year. When the roof works are eventually carried out and the sinking fund is used to pay for them, the expenditure becomes allowable in the year the works occur (assuming it is a repair, not an improvement).

Records You Need to Keep

For every service charge or ground rent payment you claim, keep:

• The annual service charge statement or demand letter from your managing agent or freeholder
• Receipts or bank statements showing the payment was made
• Any breakdown of what the service charge covers (maintenance, insurance, reserve fund, etc.)
• Ground rent demands and payment confirmations

HMRC can ask to see these records if they carry out a compliance check. For more on what to retain after filing, see After Your MTD Quarterly Update: What Records You Must Keep and Store and HMRC Rental Income Enquiries: Records You Need to Keep.

Keep records for at least five years after the filing deadline for the relevant tax year.

Pulling It Together

Service charges, ground rent, and managing agent fees are genuine allowable expenses - but they are easy to mishandle. Ground rent goes under the rent and rates category. Routine service charges belong in repairs and maintenance or insurance depending on what they cover. Sinking fund contributions are not claimable until the money is spent. Capital improvements are never allowable revenue expenses, regardless of how they are billed.

Getting these right in each quarterly update is straightforward once you know the rules. The bigger risk is not knowing them and leaving a consistent, predictable deduction unclaimed every quarter. If you are filing MTD for the first time, take a look at First MTD Q1 Filing: What Landlords Must Include for a broader checklist of what to pull together.