Unpaid rent and bad debts for landlords

Q: What are the common mistakes?

Claiming bad debts on the cash basis. The rent was never taxed, so there is nothing to relieve. Leaving arrears out of accruals accounts. The correct route is to include the rent and then deduct a specific bad or doubtful debt. Using a percentage reserve. PIM2072 rules this out except in the narrow case of a large portfolio with a reliable history. Deducting in the wrong year. The deduction belongs to the year the debt becomes bad or doubtful. Forgetting recoveries. Deposits applied to arrears, later payments and loss of rent insurance claims are all income when received. The rules for moving between bases, which pick up rent owed at the changeover, are covered in the cash basis for property income. If HMRC opens a check into your return, tax investigation insurance pays your accountant's fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

If you use the cash basis, rent your tenant never pays is never taxed, so no relief is needed. If you use the accruals basis, the rent is included as income for the period the tenant occupied the property, and you then deduct it in the year it becomes bad, or to the extent it is estimated to be bad, once you have taken all reasonable steps to recover it (PIM2072). Anything you later recover is taxed as income of the year you receive it.

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Do I pay tax on rent my tenant has not paid?

The answer turns on how your profits are calculated. PIM1094 explains that a property business on the cash basis does not account for debtors or for bad and doubtful debts: rent is income only when it is received, so unpaid rent simply never reaches the return. The cash basis is the default for most individual landlords with receipts of £150,000 or less (PIM1092), so many landlords with arrears have nothing to adjust.

Companies, trustees, larger landlords and anyone who has elected out of the cash basis use the accruals basis. Under PIM1101, rent earned in the year is included even if it has not been paid by the year end or may never be paid. The relief for arrears comes through a separate deduction. Our page on when rent is taxable explains how each basis allocates rent to tax years.

What is the legal basis for the deduction?

Section 35 ITTOIA 2005, which applies to property businesses through section 272, says no deduction is allowed for a debt owed to the business except so far as the debt is bad, is estimated to be bad, or is released as part of a statutory insolvency arrangement. Section 35(2) adds that if the debtor is bankrupt or insolvent, the whole debt is treated as estimated to be bad except for any amount that may reasonably be expected to be received. PIM2072 notes the same rule for companies under the Corporation Tax Act 2009.

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When can a landlord on the accruals basis claim the deduction?

PIM2072 sets out HMRC’s approach:

A deduction is allowed for a debt that is clearly irrecoverable, and for a doubtful debt to the extent it is estimated to be irrecoverable. The deduction is the full debt less anything the landlord expects to recover.
The landlord must have taken all reasonable steps to recover the debt.
The deduction is made in the year the debt becomes bad or doubtful, not by going back to the year the rent was earned.
A general bad debt reserve, such as 5% of all arrears just to be safe, is not allowed. Each tenant’s position has to be considered on the facts.
A tenant who is always a slow payer is not enough. There must be good reason to think the debt is likely to be bad.

There is a narrow exception for larger portfolios. Where a landlord has a large number of tenants and records showing a stable past pattern, PIM2072 accepts that a provision for tenants already in arrears, calculated from that history, may be deducted. The general accounting principles are covered on our page on bad debts in accounting and tax.

What if I waive the rent or give the tenant time to pay?

PIM2072 draws three distinctions that often decide the outcome:

Waiver for reasons other than inability to pay. No deduction is due. HMRC’s example is rent waived simply because the tenant is a relative. Lettings to family at less than a full rent have their own restrictions, set out in letting to family below market rent.
Waiver before the rent is due that changes the lease. If the landlord agrees, before rent payable in advance falls due, to revise the lease terms because the tenant cannot afford them, and the waiver is effective, the landlord can no longer sue for that rent and is not taxable on it.
Time to pay without changing the lease. The rent remains taxable. The bad debt rules may still apply if there is genuine doubt that the tenant will ever pay.

What happens if the rent is recovered later?

Under PIM2072, a recovery of a debt that was deducted is brought in as a receipt of the property business in the year it is received. A doubtful debt that later looks as if it will be paid is also brought back in when the prospects change. This keeps the overall result right without reopening earlier returns.

Two common sources of recovery need care:

Tenancy deposits. For a cash basis landlord, PIM1094 says any part of a deposit kept at the end of a tenancy is income when the landlord becomes legally entitled to keep it. For an accruals basis landlord, deposit money applied against rent arrears already deducted as bad is a recovery of that debt.
Insurance. PIM2110 says premiums for cover against loss of rents are allowable, and amounts received under such policies for loss of rent are taxable as income of the property business. Policies of this kind are described on our rent guarantee insurance page.

How does it work in practice?

Illustration only. Daniel lets a shop through his property company, which uses the accruals basis and has a 31 March year end. The tenant stops paying in January 2026, owing £6,000 by 31 March 2026. At that date Daniel’s solicitor has issued a demand and the tenant is still trading, so there is no good reason yet to treat the debt as bad, and the £6,000 is taxed as income for the year.

In September 2026 the tenant enters insolvency. The insolvency practitioner’s estimate suggests creditors will receive about 10%. In the year to 31 March 2027 Daniel deducts £5,400, being the £6,000 less the £600 he reasonably expects to receive. In 2028 he receives £900. The £900 is income of the year to 31 March 2028, because it is a recovery of an amount already deducted.

Had Daniel been an individual on the cash basis, none of the £6,000 would have been taxed until it was received, and only the £900 would ever have appeared as income.

What evidence should a landlord keep?

Because the deduction depends on reasonable recovery steps and a genuine assessment of each tenant, keep a file for each debt: the rent account, reminder letters, any agent reports, solicitor correspondence, court or insolvency papers, and a note made at each year end explaining why the debt was treated as good, doubtful or bad. If HMRC opens an enquiry, this is what supports the figure. A deduction that creates or increases a loss is relieved under the normal property loss rules, set out on our page on rental losses.

What are the common mistakes?

Claiming bad debts on the cash basis. The rent was never taxed, so there is nothing to relieve.
Leaving arrears out of accruals accounts. The correct route is to include the rent and then deduct a specific bad or doubtful debt.
Using a percentage reserve. PIM2072 rules this out except in the narrow case of a large portfolio with a reliable history.
Deducting in the wrong year. The deduction belongs to the year the debt becomes bad or doubtful.
Forgetting recoveries. Deposits applied to arrears, later payments and loss of rent insurance claims are all income when received.

The rules for moving between bases, which pick up rent owed at the changeover, are covered in the cash basis for property income.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.