Taxation Rules For Landlords
Rules on paying tax when renting out your property can be quite complicated and are updated regularly so it pays to get professional advice. However here is a short guide to help you understand some of these complex rules.
1. Paying Income Tax
When you first rent out your property you must tell HM Revenue and Customs (HMRC) as you may have to pay Income Tax. If you don’t, you run the risk of being charged a penalty. Any profit you make from renting out your property is part of your income, and as such is subject to income tax. The amount of tax you pay on this is subject to your total taxable income. IF you pay the basic rate of tax then you will pay 20%, while if you are a higher rate tax payer you will pay 40% and if you’re in the additional rate bracket you will pay 45%. It is also worth noting that as of 6 April 2016 you may pay a different rate of Income Tax to the rest of the UK if you live in Scotland.
(Source – www.gov.uk/renting-out-a-property/paying-tax)
If you are eligible you may also be able to claim Income Tax reliefs, which means that you either pay less tax to account for the money you’ve spent on specific items or get your tax repaid. Sometimes you get these reliefs automatically, but there are others you must apply to be eligible.
In order to calculate your costs it is probably worthwhile setting up a separate account for your rental income. That way it will stop your various revenue streams from being confused, and it should also be easier for you to work out your profit and expenses. You must remember that that only PROFITS from renting your property are liable for income tax and that to calculate your profits you will need to deduct “allowable expenses” first.
2. Calculating “allowable expenses”
When you calculate these you will need to understand the difference between revenue and capital expenses.Revenue = expenses that relate to the day to day running and maintenance of the property and can be offset against an income tax bill.
Capital Expenses = expenses that will increase the value of the property such as renovations. These can’t be deducted from your income tax bill, but you may be able to offset them against Capital Gains Tax.
Any costs deemed to be essential to you performing your duties as a landlord can be offset against your rental income, which then will reduce your tax liability. These include, but are not limited to:
- Letting Agent Fees
- Legal fees for a year or less
- Accountants’ fees
- Buildings and contents Insurance
- Interest on any property loans you may have taken out
- Money spent on maintenance and repairs (but not home improvements)
- Ground rent and service charges
- Utility and council tax bills
3. Tax breaks for landlords changed in 2015 summer budget
In 2015, George Osbourne announced a slight change to the legislation on “allowable expenses”. Landlords could previously charge 10% of the rent for “acceptable wear and tear” even if no actual improvements had been made. From April 2016, landlords can only deduct expenses they actually incur.
Chancellor Osbourne also announced that tax breaks for landlords would be curbed in order to “create a more level playing field between those buying a home to let and those buying a home to live in”. As a result of these changes it was said that the amount of tax landlords can claim as relief would be capped at the basic rate of tax over the course of a four year period beginning in 2017.
Due to the recent change in government it is worth keeping an eye on these proposed restrictions as we all know how quickly a U-turn can happen within government. The idea is to help make the tax system fairer and ensure landlords with higher incomes no longer receive the most generous tax treatment.
4. Calculating your profits
If you are looking to work out your net profit for your lettings as a single business then you must:
- Add together all of your rental income from all of your properties
- Add together all of your allowable expenses
- Take away the expenses from the income
If you are making a loss:
If you are making a loss in your rental properties then you’ll need to deduct any losses from profits and enter the figure on your Self-Assessment form, remembering that your losses can be offset against future profits (by carrying it over to a later year) or against profits from other properties in your portfolio.
Helpful guidance, specifically for landlords, about submitting your tax return is provided on the gov.uk website as well as providing further advice and information. It’s very important that your tax return is completed accurately and within the relevant time frames, otherwise you can face penalties. The details of the nature and severity of such penalties can be found on the charity Tax Aid’s website taxaid.org.uk.
A final piece of advice is to speak with other experience landlords or an accountant about the taxation rules, their knowledge in this area can be an invaluable source of information to help ensure you are following best practices.