The taxation rules for landlords get updated on a regular basis in the United Kingdom. This guide explains the latest tax obligations for those who rent out a property.
PAYING TAX: You may be liable for Income Tax and National Insurance if you are renting out your property.
That means you must inform HM Revenue and Customs so you can pay Income Tax on any profit made. Failing to do so could result in a penalty.
If so, and your profits are more than £6,475 per year, you will need to pay Class 2 National Insurance. If all these circumstances apply to you then you are running a property business:
Landlords making profits less than £6,475 can choose to make voluntary Class 2 NI payments. One reason for doing so is to ensure you qualify for the full State Pension.
Note: You only National Insurance if you are running a business. You can do some work without being part of a business operation. Examples include arranging tenancy agreements and making repairs.
Receiving the first £1,000 of income from property rental is your tax-free 'property allowance'. But, the rules on tax and NI change if you get income between £1,000 and £2,500 a year from renting out your property.
If so, you must contact HM Revenue and Customs. But, you must report it on a Self Assessment tax return if you get income:
Note: You will need to register before 5th October following the tax year you had rental income if you do not usually send in a tax return.
The best way to declare unpaid tax is by informing HMRC about your rental income from any previous years. You may have to pay a penalty but it is lower than if HMRC discover the undeclared income themselves.
HMRC give you a disclosure reference number. The system grants you 3 months to calculate what tax you owe and pay it. Read the Let Property Campaign for further details.
Landlords should count rental income from a property owned by a company the same way as any other business income.
You can reduce income tax by claiming for costs in the normal way. But, there are different tax rules for:
Renting out a commercial property means you can claim plant and machinery capital allowances on some items (e.g. a garage, shop, or lock-up).
You or your company are liable for tax on profit made from renting out the property. But, this will be after any deductions for 'allowable expenses'.
Allowable expenses means things you need in the day-to-day running of the property. Examples of payments for expenses include:
Note: Allowable expenses do not include 'capital expenditure'. That means buying the property or renovating it beyond normal repairs for wear and tear do not count.
You can usually claim tax relief on money paid for the 'replacement of domestic items relief'. Typical domestic items include:
Each domestic item must be for use by tenants living in a residential property. The replaced item must not get used any longer in that property. You can claim replacement of domestic items relief from:
In some cases you can claim 'wear and tear allowance':
As a rule, you can claim for these items for furnished holiday homes:
Note: You can only claim for these reliefs if all these conditions apply to you:
Your profits count as earnings for pension purposes if you own the property personally.
You will need to work out the net profit (or loss) for all your property lettings as for a single business. The exception would be for furnished holiday lettings. Follow these steps to calculate your profit:
Calculate profit or loss from furnished holiday lettings separate from any other rental business. That ensures you only claim these tax advantages for eligible properties.
Note: The video presented by HM Revenue and Customs contains further information about what to include on a Self Assessment tax return if you are getting income from property.
You should deduct any losses from your profit and then enter the figure on your Self Assessment form. You can offset losses against:
Note: Offsetting losses against future profits must occur in the same business.
Landlords Paying Tax on Rent and National Insurance when Renting Out Your Property