Tax surrounding property ownership can seem complicated if you are a first time landlord, but it is important to understand which tax bracket you sit in, how much of your rental income is taxable, and which costs are considered as ‘allowable expenses’.
As experienced lettings agents, Kings Lettings want to make being a landlord as simple as possible which is why we’ve explained the basics of landlord tax below.
HOW TO CALCULATE TAXABLE INCOME
You must pay tax on any profit you make from rental income.
Rental profit is the value of income remaining after allowances and expenses have been deducted from your overall rental earnings. If you rent multiple properties, then the total sum of your income and losses are added together and taxed as one figure.
Rental income from properties outside the UK will be charged separately.
The rules differ if:
- You are renting out a room in your home
- You’re letting a furnished holiday home
- You’re renting out foreign property
- You live abroad but rent out UK property
KEEPING RECORDS
You’ll need to keep accurate records of your rental income as well as any expenses in order to accurately calculate how much tax you owe.
For this you could keep:
- Receipts
- Invoices
- Bank statements
- Mileage logs (used specifically for property business purposes, i.e. visiting a property for an inspection)
INCOME TAX RATES
Your rental income tax rate will depend on the value of your annual rental income:
| Band | Taxable Income | Tax Rate |
| Personal Allowance | Up to £12,570 | 0% |
| Basic rate | £12,571- £50,270 | 20% |
| Higher rate | £50,271 – £150,000 | 40% |
| Additional rate | £150,000+ | 45% |
JOINT OWNERSHIP TAXATION
If you share ownership of a rental property then the amount of income that is tax deductible depends on your share of the overall income.
JOINTLY OWNED PROPERTY WITH A SPOUSE OR PARTNER
If you jointly own a rental property with a spouse then the rental income will be taxed in equal shares. If you own the property in unequal shares and claim rental income accordingly, then you need to declare beneficial interests in joint property and income so that it can be taxed in the correct proportion.
JOINTLY OWNED PROPERTY WITH SOMEONE WHO’S NOT A SPOUSE
If you jointly own a property with someone who is not a spouse or partner then your total profit and losses will be calculated based on the share of the property you own.
PROPERTY ALLOWANCE
If you personally own the property you’re renting out, the first £1,000 from your rental is tax-free as it is your property allowance. You do not need to report annual rental income if it is less than £1000.
INTEREST RELIEF
From April 6th 2020, Income Tax relief was restricted to the basic rate of Income Tax on all rental property costs.
This affects:
- UK residents who let residential property in the UK or abroad
- Non-UK residents who let residential property in the UK
- Individuals who let residential properties as a partnership
- Trustees and beneficiaries liable for Income Tax on profits gained from residential property
The financial costs restrictions include interest on:
- Mortgages
- Loans of any kind
- Overdrafts
ALLOWABLE EXPENSES
Property expenses can be allowable for tax deductions once your rental income exceeds £1000, as long as the expenses are exclusively for the purposes of renting out the property.
These include:
- Maintenance and repair of your rental property (excluding home improvements and renovations)
- Council tax as well as gas, electric and water rates
- Cost of maintenance services such as boiler repairs, gardeners and cleaners
- Accounting fees
- Lease renewal or legal fees for lets of a year or less
- Letting agents fees
- Select landlord insurance fees
- Costs such as advertisement, phone calls and travel costs involved in finding a tenant
You cannot claim for any personal expenses including, but not limited to, the full amount of your mortgage payment or any clothing bought with relation to property meetings.
HOW TO REPORT YOUR TAXABLE PROFITS
You must report on a Self Assessment tax return if you earn:
- £2,500 to £9,999 after expenses
- £10,000 or more before expenses
You need to register your tax return by 5th October following the tax year you had rental income.
If you are considering becoming a landlord, it is vital to understand how this will impact you financially and where tax sits within your overall rental income. That’s why Kings Lettings will be open and honest about landlord tax, landlord insurance and client money protection, and answer any queries you have.
KINGS LETTINGS, 103 HIGH STREET, MAIDENHEAD, BERKSHIRE, SL6 1JX
Lettings and property management offices in London, Reading, Maidenhead, Staines & Windsor.
T: +44 (0)16 2863 2188 | E: MAIDENHEAD@KINGS-LETTINGS.CO.UK
