Tax on Rental Income

Earning income from renting out a property has become very popular over the last couple of decades, especially with those who have money to spare.

Despite increases in stamp duty over the last couple of years, it remains a good investment opportunity. Not only do you get the value of the property when you come to finally sell it but you are also able to benefit from regular rental income in the meantime.

But what tax do you need to pay? We take a closer look.

What Do I Pay Tax On?

As with any other business, you will need to pay income tax on the profits you make. Your personal circumstances will also impact on the amount you pay. If you are currently employed doing another job, the tax you pay will need to be considered. If the rental income is your only source of income, then it will not.

The tax bands are 0, 20, 40 and 45% depending in which area your income stream falls into. If you decide to convert your rentals to a limited company, other corporate tax rules will, of course, apply.

What is Your Rental Income?

Working out what your rental income is and how much of this should be taxed can depend on several issues. If you are a landlord and have a live-in lodger, for example, you may be able to earn £7,500 tax-free a year under certain circumstances.

In other circumstances, your rental income may include not only the rent but utility costs, cleaning fees if you run a block of flats, parking fees and some other additional amounts. Anything that constitutes making money from your business needs to be accounted for.

What Are Allowable Expenses?

As a landlord, you are liable to certain tax relief on the amount you spend to run your business. These need to be deducted from your rental income before you come up with the figure that is taxable. This includes:

  • Insurances that you have relating to the property – including landlord and buildings insurance.
  • The cost of repairs and maintenance.
  • The interest you have on the mortgage for the property.
  • Services such as letting or estate agents.
  • Payment for utilities and council tax when properties are unoccupied.
  • Fees for advice and services such as for accountants and legal teams.
  • General expenditure such as administration costs including phone calls and advertising.
  • Vehicle running costs relating to your property.

There are certain things that are not included in allowable expenses such as the full cost of your mortgage, any home improvement costs and personal expenses.

New rules means that certain financial costs will be more restricted in the future and primarily affects mortgages, loans and overdrafts. This is being phased in from 2017 and will be complete by 2020. Find out more here.

How Do I Declare Tax on Rental Income?

You will need to declare you tax income by the end of 31st January each year as with any self-employed business. If your income is less than £2,500 all you need to do is report it to HMRC. If it is above this, you will have to fill in a self-assessment form which will calculate what you owe automatically and needs to be paid by the January deadline. This can be done quickly and easily on the HRMC website

Do I Need to Pay Council Tax?

This is normally the responsibility of the tenant to pay and theirs alone. If the property is empty, however, you will need to pay the council tax for this period.

Is the Deposit Taxable?

If the deposit is returned in full to the tenant at the end of their residency, then it is not taxable. If the landlord takes some of the that deposit to pay for repairs and the like, then it is considered as part of the rental income.

What If I Have Several Properties?

If you have more than one rental property, the expenses for running your portfolio can be lumped together which means you can offset losses on one side with gains on the other. If you have your own properties and a share of a rental business, these are treated as separate. There are also different rules if you also own a property overseas.  

If you need more information on tax on rental income from UK properties or Foreign Properties, we recommend contacting one of our specialist tax accountant. We offer free advice with no obligation to use our services.