If you’re renting out a property, then this is a taxable activity, and you need to complete an annual self-assessment tax return. There are different requirements if you are renting out property through a company, we will just deal with individual landlords in this blog post.
Property rental will be subject to income tax. The rate at which you are taxed will depend on any other income you have as your income will be looked at as a whole, but will be one of 0%, 20%, 40% or 45%.
Please note that the rules around property rental and tax do change from time to time. What I describe below is true as at the date of writing this.
Registering for self-assessment
To register for self-assessment, you can follow this link to the HMRC website. You may already be registered if, for example, you are self-employed. If you have a unique taxpayer reference (UTR) already then it is likely that you will not need to register. Following the link and registering will provide you with a UTR.
The tax year runs from 6 April one year to 5 April the next year. You need to be registerd with HMRC by 5 October following the end of the tax year in which your rental started, and complete your return and pay any tax due by 31 January following the end of the tax year.
What costs can you claim?
Firstly it is important to distinguish between capital items and revenue items. Effectively a capital item is one that in purchasing it, you have increased the value of what you own. Purchasing the property itself is a capital item, as are any improvements you make to the property such as adding an extension or converting a loft.
Capital items are unable to be claimed as a deduction on your tax return. In purchasing them, you are adding to the value of your asset and the theory is that when you come to sell that asset, the value will be returned to you then. Capital purchases will however mean that you have less Capital Gains Tax to pay on the sale (see below).
Most other items are revenue items and can be claimed as a deduction on your tax return. These include things such as day to day maintenance (e.g. fixing a broken tap or shower), landlord insurance, service charges, managing agents fees, accountants fees, cleaning costs, security costs.
If the property is vacant between tenants, or if you pay for them and recharge to the tenant, you can claim costs on utilities and council tax.
You can also claim costs of travel to the property to conduct an inspection or to do repairs, and maybe some costs that you may not expect such as a portion of your mobile phone bill but this would need to be a realistic estimate of how much of the usage relates to managing your rental property.
Mortgages can be claimed in part as a tax deduction. Using the capital/revenue rule, any capital repayments of your mortgage cannot be counted. The interest part of your mortgage has historically been able to be claimed as a deduction, although since the 2017-18 tax year, the amount you can claim has been reducing and from April 2020, none of it can be claimed as a deduction on your profit through rental.
However you do get relief at the basic rate of tax (20%) against your overall tax bill. If you are a basic rate tax payer – that is if your total income is under £50,000 – then you will not notice any difference from these changes. If your income is above this then your tax bill will increase due to these changes.
Jointly owned property
If you jointly own a property with one or more other individuals, then you will each need to declare your portion of income and costs on your self-assessment return. It is assumed that all income and costs are split evenly, unless you declare otherwise to HMRC.
Property rental allowance
If your income and expenses are small, then you may wish to claim the property rental allowance. This allows you to claim £1,000 rather than the actual costs you incur on your property rental. If your income is below this amount, then you do not need to tell HMRC about your rental and may be able to avoid completing a tax return. In practice, this is unlikely to happen very often.
Renting part of your own property
If instead of renting out a property distinct from your own, you rent out part of your own property, then you are entitled to claim the Rent a Room allowance, which effectively allows you to deduct £7,500 from your rental income.
Selling your rental property
If you sell your rental property, then it will be subject to Capital Gains Tax, which as of April 2020 needs to be reported and paid within 30 days of the sale. It is therefore a good idea to register in advance using this link on the HMRC website if you are in the process of selling a property.
To work out the tax payable, you would need to first work out the capital gain you have made. This is calculated by taking the sale price and deducting all the costs of sale, costs of purchase, purchase price and cost of any capital improvements undertaken.
Once you have calculated this, you can work out the tax payable. If you have lived in the property at any point, then you can claim Private Residence Relief, which means that a percentage of the gain is deducted before calculating Capital Gains Tax.
Everyone has an Annual Exemption amount for capital gains which currently stands at £12,300. If your total capital gains for the financial year are below this, then you will have no tax to pay. If you need to pay tax, then it will be charged at either 18% or 28% depending on the rest of your income.
If you live abroad
If you don’t live in the UK, you may fall under the non-resident landlords legislation. With this, a managing agent or tenant will need to deduct part of your rental income before it is sent to you. Obviously this may be inconvinent in terms of your cash flow and it is also possible that the amount deducted will be higher than the amount of tax that is due to be paid so you will be due to reclaim it at the end of the year. You can apply to be exempted from this scheme. Further guidance around this can be found here.