Are there tax reliefs for HMO landlords in the UK?

Landlords operating Houses in Multiple Occupation (HMOs) in the UK face different regulatory and management demands compared to standard buy-to-let (BTL) properties. However, these properties are often eligible for various tax reliefs, deductions, and allowances that can significantly reduce the taxable income generated from the property business, provided the landlord adheres strictly to HMRC guidelines regarding expenditure classification and record-keeping.

Are There Tax Reliefs for HMO Landlords in the UK?

Operating a property business, particularly one involving HMOs, requires meticulous financial management. While rental income is subject to Income Tax, HMRC allows landlords to offset this income with various expenditures and reliefs, ultimately reducing the overall tax liability. The key to successful tax planning as an HMO landlord lies in understanding exactly what constitutes an ‘allowable expense’ and how to utilise specific allowances like Capital Allowances.

Allowable Expenses: Reducing Rental Income Tax

The most immediate form of tax relief is the deduction of revenue expenses. These are costs incurred wholly and exclusively for the purpose of the property rental business and are used to maintain the income-generating capacity of the HMO.

Common Allowable HMO Expenses

HMOs typically involve higher operational costs than single-tenancy units, and many of these expenses are fully deductible against rental income:

• Utility Bills: Since many HMO rents are inclusive of bills, costs such as gas, electricity, water, and broadband are generally deductible.
• Council Tax: If the landlord is responsible for paying Council Tax between tenancies or if it is included in the rent.
• Insurance: Specialist HMO landlord insurance, liability insurance, and contents insurance (for landlord-owned items).
• Repairs and Maintenance: Costs associated with maintaining the existing condition of the property (e.g., repairing a broken boiler, replacing worn carpets, external painting). Crucially, this must be a repair, not an improvement (see below).
• Management Fees: Costs paid to letting agents for finding tenants, collecting rent, or managing the property.
• Safety Certification Costs: Expenses related to required annual Gas Safety Certificates, Electrical Installation Condition Reports (EICRs), and fire safety equipment maintenance.
• Legal and Professional Fees: Costs for professional advice relating to the letting of the property.

It is crucial to maintain detailed receipts and invoices for all claimed expenses. If you are uncertain about what constitutes an allowable expense, seeking advice from an accountant specialising in property taxation is highly recommended.

For official guidance on allowable expenses, you can refer to the UK government’s guidance on taxable rental income and deductions.

The Value of Capital Allowances for HMOs

One of the most valuable, though often overlooked, tax reliefs available to HMO landlords is Capital Allowances. These allowances are primarily claimed on “plant and machinery” within the property, which essentially includes fixtures and integral features necessary for the functioning of the dwelling.

Unlike standard repair deductions, Capital Allowances allow landlords to claim relief for capital expenditure—the cost of purchasing assets that have a lifespan exceeding two years. For HMOs, which often require extensive furnishing and communal facilities, these claims can be substantial.

What Qualifies for Capital Allowances?

If you own the HMO property directly (rather than via a company), Capital Allowances can typically be claimed on items such as:

• Fitted kitchens and communal appliances (fridges, washing machines, ovens).
• Sanitaryware and integral features (e.g., central heating systems, hot water systems, electrical wiring).
• Fire safety equipment (fire alarms, emergency lighting, fire doors, extinguishers).
• Furniture in communal areas and bedrooms (unless claimed under Replacement of Domestic Items Relief).

HMO landlords must differentiate these claims from general property improvements. A significant benefit of HMOs is the commercial nature of their operation, which often allows for broader claims compared to a standard residential BTL.

Capital Expenditure vs. Revenue Expenditure: The Critical Distinction

The biggest compliance trap for any HMO landlord is confusing capital expenditure (non-deductible against income, but potentially eligible for Capital Allowances) with revenue expenditure (fully deductible against income).

• Revenue Expenditure (Repairs): Restores the property to its original condition. Example: Replacing a broken window pane.
• Capital Expenditure (Improvements): Enhances the property beyond its original condition or constitutes a significant upgrade. Example: Installing a completely new bathroom suite where none existed before, or upgrading single glazing to double glazing.

If a large repair includes an element of improvement, the expenditure must be apportioned—only the repair element is deductible as revenue expenditure.

Relief for Replacement of Domestic Items

Since 2016, landlords of furnished residential properties, which includes most HMOs, can claim the Replacement of Domestic Items Relief. This relief replaces the old Wear and Tear Allowance.

This allows you to claim a deduction for the cost of replacing ‘domestic items’ like:

• Furniture (beds, sofas, tables).
• Furnishings (curtains, carpets).
• Household appliances (fridges, freezers, washing machines).

The key here is that the item must be a replacement for an old item, not an initial purchase, and the deduction is limited to the cost of a like-for-like replacement, plus the cost of disposal of the old item.

Financing Costs and Tax Relief

Financing an HMO purchase or refurbishment often involves specialist property finance, such as HMO mortgages or bridging loans for quick acquisitions or renovations. While interest relief rules have changed for residential properties, HMO landlords need to be aware of the restrictions.

Since 6 April 2020, individual (non-corporate) landlords can no longer deduct all finance costs (such as mortgage interest) from their property income. Instead, they receive a basic rate tax credit (20%) on their finance costs. This change applies equally to HMOs owned by individuals.

If an HMO is owned via a Limited Company, the company can generally still deduct 100% of the interest costs as a business expense before Corporation Tax is calculated. This is why many professional HMO landlords choose to incorporate.

Note on Property Finance Risk

If you use specialist finance like a bridging loan to acquire or refurbish your HMO, be aware that these are usually short-term solutions requiring a defined exit strategy (e.g., refinancing onto an HMO mortgage or sale). While highly flexible, bridging loans typically roll up interest rather than requiring monthly payments. Your property may be at risk if repayments are not made. Potential consequences of default include legal action, repossession, increased interest rates, and additional charges, which could severely impact your investment returns.

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HMRC Compliance and Record Keeping

To successfully claim the various tax reliefs available, HMO landlords must maintain diligent and accurate records. HMRC expects landlords to keep records for at least five years after the self-assessment deadline for the relevant tax year.

Key records required include:

• All rent statements and tenancy agreements.
• Invoices and receipts for all deductible expenses, categorised correctly (e.g., repairs, insurance, utilities).
• Documentation supporting Capital Allowances claims, including dates of purchase and installation.
• Records relating to property sales, necessary for calculating Capital Gains Tax (CGT).

People also asked

Can I claim tax relief on refurbishment costs for an HMO?

Whether refurbishment costs qualify for tax relief depends on if the work is classified as a repair or an improvement. Routine repairs are deductible as revenue expenses, whereas significant upgrades or improvements (capital expenditure) are not immediately deductible but may qualify for Capital Allowances if they relate to fixtures and machinery.

Are HMO mortgage interest payments fully tax deductible?

If the HMO is owned by an individual landlord, full deduction of mortgage interest is no longer permitted. Instead, landlords receive a 20% basic rate tax credit on their finance costs. If the HMO is owned by a Limited Company, the interest is generally fully deductible as a business expense against the company’s profits before Corporation Tax.

Do I pay Capital Gains Tax (CGT) when selling an HMO?

Yes, selling an HMO usually triggers a CGT liability on the profit (gain) made from the sale, minus deductible costs like Stamp Duty Land Tax (SDLT), professional fees, and certain capital improvement costs. Unlike owner-occupied homes, residential investment properties do not qualify for Private Residence Relief.

What is the difference between an HMO and a standard BTL for tax purposes?

While both are rental properties, HMOs often have higher running costs (utilities, management, safety maintenance) which are all deductible. Critically, the operation of an HMO can sometimes be viewed as a more commercial venture, potentially allowing for more robust claims under Capital Allowances due to the specific fixtures and safety requirements often installed in these properties.

How does Stamp Duty Land Tax (SDLT) apply to HMOs?

SDLT is payable on the purchase of the HMO. However, if the HMO qualifies as a residential property containing six or more separate dwellings, it may be possible to pay the lower Non-Residential SDLT rates, rather than the higher Residential rates, which can be a significant saving for multi-unit properties.

Conclusion

Tax relief is certainly available for HMO landlords in the UK, making the sector potentially profitable despite higher regulatory overheads. The reliefs are multifaceted, extending beyond simple running costs to include significant allowances for essential fixtures and fittings. Success in maximising these benefits requires continuous professional advice and stringent adherence to HMRC rules concerning the delineation between repairs and capital improvements. Given the complexity, consulting a specialist tax advisor who understands the nuances of HMO legislation is highly recommended to ensure you claim all available reliefs correctly.