The Ultimate Landlord Tax Guide

landlords

If you asre a landord, you’ll need to pay income tax on the rent you receive from your properties. This guide explains how you calculate what you pay and how income tax is applied to rental income.

How much tax do you pay on rental income?

When you rent a property to a tenant, you pay tax on any profit you make from rental income that is not covered by your personal allowance, which is currently set at £11,850. The amount of tax that you pay depends on which tax band you fall into.

You can calculate your profits by adding together your rental income and deducting any allowable expenses from this total.

Your rental income includes any money made from sources such as:

  • Rent money paid by tenants
  • Utility costs (e.g. gas, electricity, water)
  • Fees for cleaning of communal space
  • Parking fees
  • Additional fees for the use of furniture

It does not include money from services which are not normally provided by landlords, such as regular meals, cleaning services and laundry services. These should be claimed separately as trading income instead of rental income.

When calculating your rental profit, you can lump any rental receipts and expenses together, which means you can claim one property’s expenses against another property’s income. The exception to this is overseas properties, which you may need to report separately as foreign income.

Allowable expenses for landlords

Landlords are entitled to certain tax relief. You can deduct the following expenses from your rental income, assuming they were incurred wholly and exclusively for renting out your property:

  • Landlord Insurance
  • General property repairs and maintenance
  • Water rates, council tax, gas and electricity
  • Interest on the mortgage used to buy the property
  • Letting agent/management fees
  • Accountant’s fees
  • Legal fees for lets less than one-year-old or for renewing a lease less than 50-years-old
  • Rents (if you are sub-letting), ground rents, and service charges
  • Wages of hired help and other services
  • Household costs (e.g. phone calls, stationery, advertising expenses)
  • Vehicle running costs (you can claim the portion used solely for your rental business)

However it is important to note that the following expenses are NOT considered to be allowable expenses for landlords:

  • Home improvement costs
  • The full amount of your mortgage payments
  • Private phone calls
  • Clothing
  • Personal expenses

You should always keep copies of receipts for any expenses you claim. It is sensible to scan or even photograph these receipts and store them on your computer. The HMRC may ask for proof of any expenses, and has a right to demand them up to six years after you claim them.

When should I report rental property income?

You need to declare your rental income to the HMRC before the deadline following the end of the tax year. The current tax year began on 6 April 2018 and will end 5 April 2019, but the deadline for online tax returns is not until 31st January 2020.

If it is your first year completing self-assessment, you need to register by 5th October in the year after you collected rental income.

You must contact HMRC if your income from property rental is less than £2,500 a year, but you must report it on a self-assessment tax return if it is:

  • £2,500 to £9,999 after allowable expenses
  • £10,000 or more before allowable expenses

If your total earnings from letting your property are below £2,500, HMRC may be able to collect your taxes through the PAYE system. For more information, you can contact their help line. Otherwise, you will have to complete self-assessment.

Some landlords should follow different rules, such as if you are renting out a room in your home to a lodger or you are letting out a property in the UK while you live abroad.

What taxes do I pay if I sell my property?

You will need to pay capital gains tax (CGT) on any secondary residential property you sell where the gain you make is above your £11,700 tax-free allowance.

Any CGT you owe from the sale of property is payable from 31st January to the end of the tax year. However, as of 2019, your CGT will be due within 30 days of selling your property.

Capital gains tax rates on residential properties:

  • 18% for basic rate taxpayers (in most cases)
  • 28% for higher rate or additional rate taxpayers

If you would like more information or for a free, no obligation consultation feel free to get in touch with us at Devlin-Whitworth here.

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