Landlords typically need to pay property tax on the profit generated from rental properties. Simply put the profit is the difference between the rental income and the deducted expenses or allowances.
Rental profits are taxed at the same rates as income you receive from your business or employment – 0%, 20%, 40% or 45%, depending on which tax band the income falls into.
What is income from a rental property?
Rental income is classified as any money you receive from renting a property. These include:
- Rent, such as renting out a flat, house, or part of them, renting out parking space
- Insurance payments received from tenants
- Any other payments received from letting of a property
- If you take non-refundable deposits or keep some money from a returnable deposit, these count as part of your rental income.
Allowable property rental expenses
When renting out property there are some allowable expenses that can be claimed against the rental income.
Rent
If you pay rent or ground rent for the property, then this is an allowable deduction from rental income.
Business rates
Any council tax or business rates you pay on the property can be classed as an allowable expense.
Insurance
Property insurance is an allowable expense. Warranties and breakdown cover for things like boilers etc. can also qualify as an allowable cost. Life insurance premiums for mortgages are not allowable deductions.
Utilities – gas, electricity, water, sewerage
It is usual for the tenant to pay for utilities, but if you do pay these bills for the property, e.g. between rentals, then you can claim them as a deduction for tax purposes.
Gardening & cleaning
Property upkeep costs that you pay for are also tax allowable. This may be regular gardening or one-off cleaning between tenants.
Other services
If you provide any other services to your tenants or property, then the costs of these are also tax allowable, e.g. telephone, satellite TV etc.
Landlord service charges
Service charges that you as landlord are charged are also tax deductible from the income for that property, for example:
Agents commission.
Agents’ fees for finding tenants, taking inventory etc.
Property management fees.
Charges by flat management company or residents’ association.
Travel
You may be able to claim some expenses for necessary visits to your property, so keep accurate records.
Property repairs & renovations
Refurbishment works such as the ones below are an allowable expense incurred and therefore are tax deductible:
Repairs – repairing something that is existing to bring it back up to original purchased quality e.g. painting & decorating, a replacement bathroom or fitted kitchen, new roof and replacing old windows for double glazed ones.
Renewals – replacing a something entirely that the property already had e.g. dishwasher, freestanding cooker, curtains. (Note: Different rules apply for businesses and there is no tax relief for the first-time purchase of furniture or equipment.)
Improvements – adding to your original purchase e.g. new conservatory, loft extension, adding a bathroom, putting in a new kitchen. This can include initial renovation costs if your purchase was not in a habitable state. These costs count as improvements to your original purchase so are tax deductible against the investment gain on sale of the property and not against income.
Tools & equipment
Capital allowances may be available for plant and machinery for a commercial property or ladders and tools you use that are not part of the property being rented out e.g. a Scaffold tower. However, Capital allowances are not available for equipment in residential property unless it’s a Furnished Holiday Let (FHL).
Professional fees
Professional fees for the property may be tax deductible but need to be attributed to either income or sale/purchase to be deducted from the capital gain on sale.
- Income deductions are for things like maintenance issues, certifications, financial advice, leases and disputes or debt collecting.
- Capital Gains deductions are for buying, selling or establishing title.
Advertising and marketing
Advertising and marketing for renting your property is tax deductible from income. However, advertising for sale costs are deductible from the capital gain on sale.
Other direct costs
Any other costs you can directly attribute to the property may also be tax deductible e.g. stationery, phone calls, association membership.
Expenses you cannot claim
Capital expenditure such as buying a property, adding an extension or paying for furnishings cannot be classed as allowable expenses.
Personal expenses that don’t relate to your rental property can’t be claimed against your rental profit – this includes your private mobile phone bill.
Clothing isn’t an allowable expense. Even if you bought overalls to do work relating to your rental property, you can’t claim it on your tax return.
Expenses if I am paying a mortgage on a rental property
- No payments of the mortgage (either capital or interest) are deductible from taxable income.
- Finance charges and loan interest are not deductible, but limited relief is available for loan interest and other finance costs.
- You may claim the tax reduction of 20% of finance costs and mortgage interest if you re-mortgage as long as the aggregate value of the mortgage(s) does not exceed the value of your property when you first let it. Contact us for more advice.
Interest & finance charges
Tax reliefs are available for all costs of obtaining, loans to purchase property or release equity including interest, arrangement fees, bank charges, but not capital repayments. The purpose of the loan is key, and it should be transparent to track.
These costs are mostly deductible from income before tax, however the rules for loan interest have changed recently for income tax on residential property income.
Only 20% of the interest may be deducted, as a credit from the income tax bill, instead of an income deduction. However this can have a knock-on effect on other taxes e.g. student loan and child benefit repayments.
Allowances and tax reliefs for UK rental income?
In the UK, there are tax reliefs and allowances available for rental income from property.
Rent a Room Relief:
The Rent a Room Scheme allows you to make up to £7,500 a year tax-free by renting out a furnished room in your home. If you share this income with someone, the limit is halved.
If you earn less than £7,500, you’re automatically exempt from tax, and you do not have to declare anything. If you earn more, you need to complete a UK property tax return.
You can then choose to join the scheme and get your tax-free allowance by doing it on your tax return.
Eligibility for the Rent a Room Relief Scheme.
- You’re a landlord living in the same place, whether you own it or not
- You’re in charge of a bed and breakfast or a guest house
You cannot use the rent a room relief scheme for homes that have been turned into separate flats.
Furnished Holiday Lettings
If you let out a property on a short-term, usually seasonal basis, specifically to tourists and visitors, there are special rules for furnished holiday lettings. More information can be found here.
Property income allowance
If you earn less than £1,000 a year from letting out a rental property, you don’t need to inform HMRC. This is a £1,000 tax-free property allowance. You should contact HMRC if your rental property income is over £1,000.
Buy-to-let tax relief:
Buy-to-let tax relief in the UK refers to the deductions landlords can claim on their mortgage interest payments to reduce their taxable rental income.
Every buy-to-let landlord get a tax credit equal to 20% of what they pay in mortgage interest.
If you made £20,000 from renting and are in the 20% tax group, your tax bill £4,000.
If say, your annual mortgage interest is £5,000you can get a tax break of £1,000 (which is 20% of £5,000).
To calculate the final tax bill, subtract the tax break from your tax bill:
£4,000 – £1,000 = £1,000 is what you owe to HMRC.
Non-Resident Landlord Scheme
The Non-Resident Landlord Scheme (NRLS) is a scheme to tax the UK rental income of landlords who have a usual place of abode outside the UK – known as non-resident landlords.
Anyone that lives abroad but receive income from letting out a property in the UK, is typically taxable in the UK.
Understanding who is a non-resident landlord is not as straightforward as being a general non-UK resident as determined by the Statutory Resident Test.
The requirements for being considered a non-resident landlord are more loosely determined as someone who rents out a UK property who is not considered to regularly live in the UK. While there are no specific laws to determine this, if a person rents a UK property and spends more than six continuous months outside the UK they would likely be considered a non-resident landlord.
It is therefore possible to be both a UK tax resident according to the Statutory Residence Test and also a non-resident landlord.
So, if you spend a significant period of any tax year outside the UK and rent a UK property, it’s vital that you understand your UK tax obligations and the Non-Resident Landlord Scheme.
Withholding income and paying tax quarterly
The Non-Resident Landlord Scheme issues a legal obligation for either the tenant or the letting agent to deduct and withhold tax from any payments due to the landlord. This tax must then be paid to HMRC every quarter.
When reporting income via a Self-Assessment Tax return, any tax already paid to HMRC under the NRLS will also be deducted from any tax due.
Exemptions from withholding tax at source
HMRC may determine that if income from rental property is low enough that there are no reporting requirements. HMRC will confirm in writing whether you are exempt from quarterly reporting and payments, so you should assume that either your tenant or your letting agent is required to report and pay tax quarterly unless you have been previously advised.
The NRLS imposes duties on the rental agent (if there is one) or the tenant. The letting agent is required to withhold income tax before it is paid to the foreign landlord.
If there is no UK rental agent, the renter must withhold tax personally if the rent paid to the overseas landlord exceeds £100 per week.
Any tax withheld by the letting agent or tenant is subsequently deducted from the foreign landlord’s UK tax liability when they file a UK self-assessment tax return.
Property losses
Property losses may be offset against any other property profits of the same rental business in the year and then carried forward against the future profits of that same business.
There are special rules where a loss is created by capital allowances or the business is in agriculture. This are called Sideways relief.
Sideways relief for losses related to capital allowances or agriculture
Where the loss is due to capital allowances or to certain agricultural expenses, sideways loss relief can be claimed against total income. The relief operates slightly differently to the relief for trading losses, because it is given against net income of the tax year of the loss and/or the following tax year. The loss cannot be carried back.
The relief is not automatic and needs to be claimed. The time limit for claiming the relief is 12 months from the 31 January that falls after the end of the tax year against which the loss is to be set.
For more information about property tax, call us on 01865 548465 or use our online contact form.
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