What landlords need to know about rental income tax

Landlords are required to pay income tax on rent received from their rental properties. This article explains more about this process, how rental income is taxed and what information landlords need to know.

Income tax is paid on any profit landlords have made from rental properties they own. This profit is calculated once expenses have been deducted from total rental income.

Deductible expenses

• Landlord insurance
• Accountancy fees
• Wages for gardeners and cleaners
• Letting agent fees
• Repairs

Landlords can also claim for the costs of replacing certain furnishings, such as beds, carpets and appliances, assuming they are a like for like replacement.

Buy-to-let mortgages  

Mortgage interest is no longer tax deductible from your rental income, however, there is now relief for finance costs available which allows landlords to claim tax relief at 20% on their mortgage interest. This relief is deducted from your total income tax liability but can’t be used to create a tax refund.

You are also eligible to carry forward any unutilised finances costs to a future tax year.

You will note it is the mortgage interest element only, any capital repayments are disallowable.

When is the rental income tax due?

Rental income reported on your tax return each year is required to be paid by 31 January following the end of the tax year.

How to complete a tax return

You must notify HMRC of any rental income you have received by 5 October after the tax year has ended (5 April). You will need to fill out a self assessment tax return if you earn money from renting out properties. Remember to get all paper tax returns submitted before the 31 October. You have until 31 January the following year for online submissions.

 

If your annual gross property income is £1,000 or less, you are not required to declare this income on your tax return.

Furthermore if you are receiving less than £2,500 income from property, HM Revenue & Customs could potentially collect this via PAYE if you are already using PAYE for other income i.e. salary or pension. If you opt for this, you will need to contact HM Revenue & Customs directly to decipher if it’s possible.

You must report your rental income on a tax return if your net rental income profits exceeds £2,500 after allowable expenses; or £10,000 gross income (before allowable expenses) thereafter.

How much is rental income taxed?

Rental income is taxed at the rate of income tax the landlord falls into. After personal allowances, this starts at the basic rate of 20%, 40% if they are a higher rate tax payer, or 45% for additional UK tax payers. Rental income is also taxed before any savings or dividend income.

If you have multiple properties

If the landlord has several properties, all the rental receipts and expenses can be combined rather than splitting per property. Therefore, if a property makes a loss throughout the tax year, this can be allocated against another property’s income thus mitigating the tax due.

However, a landlord that owns shares in a separate rental business will be treated as two separate businesses. The same applies for overseas properties.

Declaring losses

There may be times that your properties lead to losses. Losses can be carried forward and set against any future rental income profits. They are carried forward on a year-on-year basis until fully utilised. Unfortunately, your rental losses cannot be offset against any other income or capital gains.

Selling rental properties

Landlords are likely to have to pay capital gains tax when they sell a residential property. This means that they will pay 18% if they are a basic rate taxpayer or 28% if they are a higher or additional rate taxpayer.

In the 2022/23 tax year, gains of up to £12,300 are currently tax-free. Married couples who co-own assets can combine their allowances and can receive up to £24,600 tax-free. Unfortunately, this cannot be rolled over, so you only have the allowance during the tax year before it is reset.

Transferring assets  

You are able to transfer rental properties to a spouse or civil partner at a no gain, no loss disposal thus meaning no capital gains tax will arise on the property. This is beneficial if your spouse has less income as the tax rates may be lower which consequently means that they will pay less income tax/capital gains tax.

It is important for landlords to understand how much rental income tax they are required to pay on their property income and how the rules may vary on furnished holiday lets foreign properties.

If you are a landlord and want to understand how much tax they need to pay, please get in touch with a member of our specialist team.