As a buy-to-let landlord, you pay tax on the money you earn from your property business - as with any source of income. In most cases you will need to register for self-assessment and complete a tax return, so the money you owe each tax year can be calculated.
You can’t avoid paying tax on your rental income, but you can ensure that you don’t pay any more than you need. You can reduce your tax bill by claiming for all the allowable expenses which you are due to, for example.
From April this year, you won’t be able to claim any tax relief on your mortgage interest payments, as this relief has been phased out, however you will be entitled to a 20% tax-credit.
If you’re new to the property business, and need help understanding the rules about tax on rental income, we’ve pulled together some frequently asked questions that might help …
What tax do I pay on rental income?
You will need to pay income tax on the profit from your rental property. This is the amount of money left from the rent after you’ve deducted all allowable expenses - the costs incurred by running your business, such as letting agent fees and insurance premiums.
How much tax will I pay on my rental income?
This will depend on how much profit you make as well as how much income you receive from other sources, such as your job or a pension.
The taxation bands for rental income are the same as for other forms of income. Be aware that your rental income added to your personal income may push you into a higher tax band.
Taxable Income 2020 – 2021
Income Tax Rate 2020 - 2021
What is included in rental income for landlords?
Your rental income will mainly come from the rent you receive but it also covers other costs which you pass on to your tenants, such as cleaning and maintenance bills for communal areas and any utility bills, included in the rent. You need to include your tenant’s security deposit, too, if you retain it at the end of the tenancy. You can deduct these costs as allowable expenses.
What are allowable expenses?
You can reduce your tax bill by claiming for some of the expenses which come with renting out property. Allowable expenses are the day-to-day costs of managing your tenancy. They are also sometimes referred to as revenue costs; distinguishing them from capital costs, such as renovations or building works, which add value to the property. Capital costs can’t be claimed for as expenses.
Allowable expenses include:
- Landlord insurance – buildings, contents and for public liability
- Letting agent and management fees
- Ground rent and service charges
- Cleaning and gardening fees, which you pay for
- Accountants’ fees
- The cost of advertising for tenants
- Stationery and phone calls used directly for your property business.
You can also claim what’s known as ‘relief for replacing domestic items’. This relief applies if you replace furniture, carpets or appliances for use by your tenants - but not when you buy them in the first place.
What about my mortgage payments?
You can’t claim mortgage repayment costs as an allowable expense. Previously you could claim for the interest element of your mortgage. However, new rules – which have been phased in and are fully-operational from April 2020 - mean you can no longer make this claim. Instead, you will receive a tax-credit, based on 20% of your mortgage interest payments.
Tax on rental income - an example
If you charged a rent of £1,500 a month, and your tenant agreed to you retaining £500 of their deposit to cover repairs for damage they had caused, you would need to declare your annual income as £18,500. However, you would be able to deduct the £500 for repairs as an expense.
What if I own more than one property?
Landlords with multiple properties can offset expenses from one property against rents from another.
The rules are different if you rent out property as well as having a share in a property company, as these two forms of rental income cannot be combined. There are also different rules if you rent out overseas property - get advice about this.
What is trading income?
Trading income is money you receive from additional services, not normally supplied by landlords, such as cleaning rooms, laundry or providing meals. This income will be treated separately from your rental income.
How do I declare my rental property income?
If you earn more than £10,000 before expenses from your property business, or £2,500 after expenses, will need to file a tax return. If your rental income is less than £2,500 you should contact HMRC, as they may collect your tax through PAYE.
Each tax year runs from 6 April until 5 April the following year. Rents received in the tax year up to 5 April 2020 need to be included in your online tax return, which must be filed by 31 January 2021. The deadline for paper returns is 31 October 2020. If you are a new landlord, who hasn’t filed a tax return before, you will need to register for self-assessment by 5 October 2020.
You must also pay the tax you owe by 31 January 2020.
What if I have made a loss?
If your property business makes a loss one year, you can offset this against your future rental income. You can’t, however, offset it against other forms of income.
For example - if you made a £2,000 loss in 2018/19 but a profit of £5,000 in 2019/20, you could deduct the previous year’s loss from your profit, so you would only pay tax on £3,000.
If you only made £1,000 profit in 2019/20, you would be allowed to carry over the remaining £1,000 loss into 2020/21.
What tax do I pay if I sell my rental property?
If you sell your rental property you will have to pay capital gains tax (CGT) on the rise in value of the property, while you have owned it. CGT is charged at 18% for basic rate taxpayers and 28% for those taxed at the higher rate.
You may be able to claim a reduction in the tax you pay if you have lived in the home as your main residence and for any capital improvements you have made - get advice from an accountant.
If you are a new landlord, contact us today. We can advise you about the various aspects of renting out a home - including tax - and help you find the buy-to-let property that’s right for you.