One of the main aspects you need to think about when becoming a landlord is the tax position and ensuring that you meet the tax reporting requirements.
When you start receiving rental income, you must notify HMRC by 5 October following the end of the tax year rental income commenced to register for Self Assessment. If you already complete tax returns you will be able to report the rental income on the return which will be due by 31 January following the end of the tax year.
Income tax is payable on rental profit, this is calculated by taking your rental income and deducting allowable expenses. The income will be taxed at your marginal rate. If a loss arises, generally this can be offset against other rental income for the year or otherwise carried forward and offset against future property income.
It is vital that you keep a copy of each rental statement as well as receipts and invoices which demonstrate the costs incurred. We also recommend keeping a record of mileage travelled in relation to managing the rental property.
Allowable Expenses
Expenses must be incurred “wholly and exclusively” for the purposes of renting the property. The tax return categorises the allowable expenses as set out below, we have listed some common expenses for each section:
Property repairs and maintenance
- General maintenance and upkeep
- Repairing damage
- Redecoration between tenants to restore property to original condition
- Like-for-like replacements of household items, furniture, appliances etc.
Legal, management and professional costs
- Management and letting agent fees
- Accountancy fees
- Legal fees in relation to renting the property
Rent, rates and insurance
- Council tax, water rates, utility bills.
- Building insurance
- Ground rents and service charges
- Annual gas safety inspection
Costs of services
- Gardening
- Cleaning
- Wages
Other
- Mileage – to meet tenants, travel for repairs, or performing inspections.
- Direct costs such as advertising for tenants, phone calls and stationery
Other considerations
- Mortgage interest – Tax relief can be claimed on mortgage or loan interest paid in relation to the rental property. On residential properties relief is restricted to basis rate and is calculated as a tax reducer.
- Property allowance – If the total allowable expenses are below £1,000, across all rental properties for the tax year, we recommend claiming the property allowance of £1,000 instead. Where this is claimed the rental profit is calculated by deducting the property allowance from the rental income.
- Rent a room relief – If you rent a spare room in the property you currently live in, you can claim up to £7,500 in relief. If the gross rental income is below the limit of £7,500, no tax will be suffered.
- Furnished holiday lets – If relevant letting conditions are met the property will be considered a furnished holiday let which can benefit from capital allowances and capital gains tax relief.
- Capital gains tax – As well as the income tax we would recommend considering the capital gains tax position if you may sell or gift the property in the future.
- Income tax planning – where properties are held jointly between spouses there may be scope to consider changing the beneficial ownership as this may result in a significant tax saving.
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