This page was curated by Herschel Santineer, a Chartered Tax Adviser at Glenstone Tax Consultancy and PM Property Lawyers, a firm which offers legal advice and conveyancing services to landlords. (All information accurate as of December 2018).
If you’re renting out your property and you’re unsure about your tax obligations, we’ve put together some of the key facts to help you. Rules on paying tax when renting out your property can be quite complicated, and they’re updated regularly, but we’ve put together a comprehensive guide to help explain these complex rules.
Paying Income Tax
You must contact HMRC if your income from property rental is between £1,000 and £2,500 a year and you must complete a Self Assessment tax return if your income is between £2,500 and £9,999 after allowable expenses (or £10,000 or more before allowable expenses).
Rental income lower than £1,000 a year
From 6 April 2017, a property allowance became available if your combined rental income from UK, overseas and commercial property is under £1,000 (before expenses). There’s no income tax to pay, no need to register with HMRC or file tax returns. There are, however, exclusions and other complexities in the legislation that could affect your eligibility, so seek advice before assuming entitlement.
The HM Revenue & Customs Let Property Campaign
The Government’s Let Property Campaign continues to be available to landlords. As HMRC increases its efforts to target landlords who have undeclared property income, it is vital that they take advantage of this campaign, where relevant. Should HMRC make contact before a disclosure is made, they can go back up to 20 years and charge penalties of up to 100% of any tax due. This is in stark contrast to the 20% penalty under the disclosure. The process can be complicated, so care should be taken in calculating any tax liability.
Any profit you make from renting out a property is part of your income, and as such, is subject to Income Tax. The amount of tax you pay on this is subject to your total taxable income. If you pay the basic rate of tax then you’ll pay 20%, while if you’re a higher rate taxpayer, you’ll pay 40%, and if you’re in the additional rate bracket you’ll pay 45%.
It’s also worth noting that if you live in Scotland, you may pay a different rate of Income Tax to the rest of the UK.
Up to £11,850
|Basic rate||£11,851 to £46,350||20%|
|Higher rate||£46,351 to £150,000||40%|
|Additional rate||over £150,000||45%|
If you’re eligible, you may also be able to claim Income Tax reliefs, which means that you either pay less tax to account for the money you’ve spent on specific items or get your tax repaid. Sometimes you get these tax reliefs automatically, but there are others you must apply for to be eligible.
In order to calculate your costs, it may be worthwhile setting up a separate account for your rental income. This will stop your various revenue streams from becoming confused, and it may also be easier for you to work out your profit, expenses and other forms of income.
It’s vitally important to remember that only profits from renting your property are liable for income tax and that to calculate your profits, you’ll have to deduct ‘allowable expenses’ first.
Calculating ‘allowable expenses’
As you calculate your expenses, you need to know the difference between revenue and capital expenses.
Revenue: revenue expenses relate to the day-to-day running and maintenance of the property and can be offset against an income tax bill.
Capital expenses: expenses that’ll increase the value of the property, such as renovations. These can’t be deducted from your income tax bill, but you may be able to offset them against Capital Gains Tax.
Some expenses you might initially consider capital will be revenue. For example, HMRC considers that double-glazing is no longer a capital improvement but a repair, even if replacing single glazed units.
Any costs that are deemed to be essential to you performing your duties as a landlord can be offset against your rental income, significantly reducing your tax liability. Allowable expenses are things you need to spend money on as part of the day to day running of the property, including:
- any letting agents’ fees
- legal fees for a year or less, or for renewing a lease for less than 50 years
- accountants’ fees
- buildings and contents insurance
- interest on any property loans you may have taken out
- money spent on maintenance and repairs (but not home improvements)
- utility bills
- rent, ground rent and service charges
- council tax bills
- any services you pay for, such as cleaning and gardening
- any other direct costs incurred, such as phone calls, advertising or stationery
- mileage to inspect the property carry out repairs or collect rents
- courses that enhance or update your existing knowledge as a landlord
Things that you can’t claim as allowable expenses include:
- the full amount of your mortgage payment - only the interest element of your mortgage payment can be offset against your income (more on this later)
- private telephone calls - you can only claim for the cost of calls relating to letting property
- personal expenses - you can’t claim for any expense that wasn’t incurred solely for your rental business
From April 2016, the long standing 10% Wear and Tear Allowance for furnished rental property was replaced by Replacement Relief. This means that instead of claiming a flat rate for wear and tear, landlords can deduct the actual costs of replacing furniture, furnishings and kitchenware.
Landlord tax relief and Budget changes
The restriction on finance cost relief for landlords (commonly known as section 24) began to take effect from 6 April 2017 and applies to mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans.
As a result, landlords will no longer be able to deduct all their costs to arrive at their property profits. Instead, they’ll receive a basic rate reduction from their Income Tax liability. The scheme is being introduced gradually, meaning that:
- in 2017-2018, the deduction from property income will be restricted to 75% of finance costs. The remaining 25% is available as basic rate tax reduction
- in 2018-2019, this will change to 50% finance costs deduction and 50% given as a basic tax reduction
- in 2019-2020, this will change again to 25% finance costs deduction and 75% given as a basic rate tax deduction
- from 2020-2021, all financing costs incurred by a landlord will be given as a basic rate tax deduction
This change in how finance costs are relieved should be monitored carefully as it could result in a landlord becoming a higher rate taxpayer; but receiving only a 20% tax reduction.
The gradual introduction of the changes over four years should theoretically help landlords adjust. If you need a little extra help, we’ve got some advice on how to prepare for the changes as well as some guidance on ways you can minimise the impact of the new system.
For more information about mortgage interest and what this means for you, we love this article from Property Geek 'What The New Mortgage Interest Rules Mean' which includes a handy calculator as well as an in depth 'hands on' analysis of the new mortgage interest relief rules.
In addition to these restrictions on mortgage interest relief, HMRC appears to have rewritten their understanding of tax relief on the interest relating to a remortgage. It has been possible to claim loan interest relief on the interest relating to a remortgage providing the revised amount of the loan did not exceed the value of the property when it was originally rented out. The revised guidance suggests that any released funds must be used wholly and exclusively for the purposes of the letting business to be eligible for relief. This is guidance, so it would be wise to take further advice if relevant.
If your letting activity is deemed as 'running a property business', you may also be required to pay Class 2 National Insurance Tax.
You'll be considered to be running a property business if being a landlord is your primary job, you let more than one property, or you acquire properties with the intention of renting them out.
You'll need to pay this tax if your profits are over £6,205 a year. If they’re under this figure, you can make voluntary National Insurance payments which, for instance, contribute towards you being entitled to the full state pension.
Stamp Duty Land Tax
As of April 1 2016, anyone purchasing a second home or buy-to-let investment has been required to pay an additional 3% in Stamp Duty Land Tax.
The rates for additional properties are as follows:
Up to £125,000
|Over £125,000 and up to £250,000||5%|
|Over £250,000 and up to £925,000||8%|
|Over £925,000 and up to £1.5 million||13%|
|Over £1.5 million||15%|
Therefore, if you purchase a buy-to-let property for £375,000, the stamp duty bill will be a total of £20,000, compared to £8,750 under the old system. This stamp duty calculator is very useful for working out how much the additional 3% will cost you.
Capital Gains Tax
Landlords will also be required to pay Capital Gains Tax (CGT) when they sell a property that’s increased in value.
CGT’s only payable on properties that aren’t the owner's main residence. Working out the gain you've made on the property is pretty straight-forward, you need to deduct the price you bought the property for from the total you’re selling it for. You’re able to deduct costs such as agents' or solicitors' fees and the costs of improvement works. However you cannot deduct items considered a revenue expense, such as Council Tax which may be payable by a landlord during "void" periods (between tenancies or during the period between the tenant vacating the rental property and the actual sale of the property). It is not a capital expense and therefore not treated as a deduction for capital gains tax purposes. It is, however, a revenue expense and therefore deductible from rental income.
Once you've worked out your gain, you can find out how much CGT you may need to pay by using a calculator like this.
There’s also an abundance of Government guidance on the complex terms and conditions of CGT, which you can find here.
The Chancellor’s October 2018 Budget speech included two important changes that could have a significant impact on landlords whose rental portfolio includes property they previously used as their main home.
Anyone renting out a property that was previously their main home could claim lettings relief of up to £40,000 (£80,000 for a couple), subject to certain restrictions. This will cease to be available after April 2020. In the case of a higher rate taxpayer eligible for the maximum relief, this would increase the capital gains tax payable by £11,200 (£22,400 for a couple, if both are higher rate taxpayers).
Furthermore, when a property had been used as a main home at any time during ownership the final 18 months of ownership were deemed exempt from capital gains. This exemption will be restricted to 9 months from April 2020 in most cases.
Since April 2015, individuals and certain other ‘entities’ who are not resident in the UK for tax purposes have been required to file a ‘NRCGT’ return for each disposal of a UK residential property within 30 days of completion, even if there is no gain. Any tax due is payable 30 days after completion, unless the vendor files Self Assessment tax returns, in which case the tax must be paid by 31 January after the tax year of disposal. It is proposed, however, that the earlier due date for the payment of capital gains tax (30 days after completion) will be extended to all disposals of residential property after 6 April 2020.
If you hold property in a company, disposals in the past have benefited from ‘indexation allowance’ (a relief that recognises the fact that part of any gain is simply due to inflation). This has been frozen from December 2017, which means that companies will not benefit from that relief from 1 January 2018. This could significantly affect the taxable gain in the long term.
Calculating your profits
If you’re looking to work out your net profit for your lettings as a single business, then you must:
- add together all of your rental income from all of your properties
- add together all of your allowable expenses
- take away the expenses from the income
If you’re making a loss
If you’re making a loss on your rental properties then you’ll need to deduct any losses from profits and enter the figure on your Self-Assessment form, remembering that your losses can be offset against future profits (by carrying it over to a later year) or against profits from other properties in your property portfolio.
Tip: To avoid penalties, maintain careful records of all rental income and expenses and keep them safely until the later of 22 months from the end of the tax year to which they relate or 15 months after submission of your tax return. If operating as a business, these time limits are substantially extended.
Completing your tax return
Tip: If you complete your Self-Assessment tax returns online, you get an extra three months to submit.
The deadlines for online and paper tax returns are listed here, where you can also find further information about the current tax year.
The site also provides helpful guidance regarding how you complete your tax return. It’s very important your tax return is completed accurately and within the relevant timeframes, otherwise you can face penalties. The details of the nature and severity of such penalties can be found on the charity Tax Aid’s website.
A final piece of advice is to speak with other experienced landlords, letting agents or an accountant about the taxation rules surrounding rental properties. Their knowledge in this area can be an invaluable source of information to help make sure you’re following best practices.
Get the latest landlord news and tips
Simply enter your name and email address below, and we'll send you our monthly Landlord Lowdown email - which is full of the latest news, views and tips for landlords.