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HMRC internal manual

Property Income Manual

Deductions: general rules: overview

Broadly speaking, in calculating rental business profits a customer can deduct business expenses so long as they are:

  • incurred wholly and exclusively for business purposes,


  • not of a capital nature.

It is not possible to set out all the expenses that are allowable for tax purposes in every circumstance. In this part of the manual we aim to give some idea of the main types of expenses that are likely to arise in a rental business and also some idea of what can or cannot usually be claimed as a deduction in calculating rental business profits.

The guidance assumes that the property is let at a market rent and there are no unusual factors (see PIM2130).

Wholly and exclusively rule

Most of the trading expenses rules are applied to property income (see PIM1100 onwards). This includes the ‘wholly and exclusively’ rule which says that expenses cannot be deducted unless they are incurred wholly and exclusively for business purposes. This is covered in more detail in PIM2010.

Capital expenses

It is a general IT principle that capital expenses can’t be deducted in computing taxable income. This applies to trades and rental businesses as well as to other activities. Hence, for example, neither the capital cost of the property that is let nor the amount of any depreciation of the property can be deducted in computing taxable profits. Nor can a loss on the sale of a property or other capital assets be deducted.

But the cost of ordinary expenditure on repairs can normally be deducted. In addition, separate tax allowances give relief for the depreciation of some capital assets. See PIM3010 onwards.

In accountancy and tax practice, expenses that are deductible as an ordinary expense in computing profits are often called a ‘revenue expense’. This is in contrast to a ‘capital expense’, which isn’t deductible. But some revenue expenses will not be deductible anyway; for example, where they fail the ‘wholly and exclusively’ test (see above).

The capital expenses and repairs rules are explained in more detail in PIM2030.

Statutory rules: IT cases for 2005/06 onwards and CT cases for 2009/10 onwards

ITTOIA05/S272 (1) and CTA09/S210 (1) provide that the profits of a property business are to be computed in the same way as the profits of a trade. The trading income rules in Part 2 of ITTOIA05 and Part 3 of CTA09 that apply for the purposes of computing the profits of a rental business are set out in ITTOIA05/S272 (2) and CTA09/S210(2), see PIM1103.

Statutory rules: IT cases to 2004/05 and CT cases up to 2008/09

ICTA88/S21A (2) provides for Schedule D Case I & II rules to be used for the new Schedule A. It directs that the statutory rules in Part IV Chapter V of ICTA88 apply in computing the profits or gains, or losses, of a Schedule A business as they do for a trade under Schedule D Case I, unless there is express provision to the contrary. Part IV Chapter V includes ICTA88/S74 - S99. The four rules that are specifically excluded are covered at PIM7030.

The statutory basis for the use of Case I rules and commercial accounting principles is covered more fully in PIM7020.

In applying the provisions of Part IV Chapter V you should interpret the legislation for Schedule A purposes as if it read ‘Schedule A business’ instead of ‘trade, profession or vocation’ or ‘trade’.

For example, the most familiar Case I rule is ICTA88/S74 (1)(a) that an expense may not be deducted unless it is wholly and exclusively laid out or expended for the purposes of the trade, profession or vocation. For a Schedule A business, the rule becomes that an expense may not be deducted unless it is wholly and exclusively laid out or expended for the purposes of the Schedule A business. 

IT is, of course, a tax on ‘income’. This principle and the use of commercial accountancy rules lead to the second leg of the test, that capital expenditure is excluded. For CT cases, ICTA88/S9 (1) provides that amounts to be taken into account as income shall be determined ‘in accordance with IT law and practice’.

This part of the manual gives only a broad outline of the trading expenses rules. For detailed guidance refer to the Business Income Manual.

Landlord’s Energy Savings Allowance (LESA) allowed qualifying expenditure to be claimed on or after 8 July 2008 and before 1 April 2015. The archived guidance is available in PIM7070.