Doing your updates
Service charges and ground rent: are they an expense?
If you let out a leasehold flat, you pay a service charge, and often ground rent, to the freeholder or managing agent. Both are allowable expenses against your rent. Here's where they go in your Making Tax Digital update, and the mistake that can turn them into income by accident.
Checked against HMRC guidance on
The short answer
Yes. The service charge and ground rent on a flat you let are costs of running your property business, so you deduct them from your rent. In your quarterly update they go under rent, rates, insurance and ground rents, HMRC's category for the costs of holding the property.
| What you pay | Claim it? | MTD category |
|---|---|---|
| Monthly or yearly service charge | Yes, while the flat is let | Rent, rates, insurance, ground rents |
| Ground rent | Yes | Rent, rates, insurance, ground rents |
| Major works bill for repairs (like-for-like) | Yes | Repairs and maintenance |
| Major works bill for improvements | Not against your rent | None: it's a capital cost |
| Reserve or sinking fund contribution | Check first (see below) | Depends |
Watch out for the word "rent" on your bank statement
Many housing associations and managing agents collect service charges by direct debit with a reference like "RENTS DD" or "HT RENTS". Software that reads your statement can see the word "rent" and file the payment as rental income. That doubles the mistake: the cost disappears and your income goes up.
The check is simple: money going out of your account is never income. Before you send each update, look at anything marked as income and make sure it was actually paid to you.
What a service charge usually covers
Building insurance, cleaning and lighting in shared areas, lifts, gardens, and the managing agent's fee. You claim the charge as one cost. Don't also claim the building insurance separately if it's already in the service charge, or you'll count it twice.
Major works and reserve funds
Sometimes the freeholder bills you separately for big jobs, such as a new roof or redecorating the stairwell. Repairs that put the building back as it was are a normal repairs expense. Improvements, such as adding something that wasn't there before, are a capital cost. You can't deduct those from your rent, but keep the paperwork, because they can reduce your Capital Gains Tax when you sell.
Some service charges include a contribution to a reserve (sinking) fund for future major works. Its tax treatment can differ from the day-to-day running costs. Ask your managing agent for a breakdown of your charge, and if the reserve part is large, check how to treat it with an accountant.
If the flat wasn't let all year
Only claim the service charge for the time the flat was let, or genuinely available to let. If you lived in it for part of the year, the charges for that period are personal costs.
If your letting agent pays it for you
Some agents pay the service charge out of the rent they collect, so it never appears on your bank statement. It'll be on the agent's statement instead. Report the full rent as income and the service charge as an expense, the same way as letting agent fees.