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.
Do You Run a Property Business?
If so, and your profits are more than £6,725 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:
- Operating as a landlord is your main job.
- You are renting out more than one property.
- You buy new properties so you can rent them out.
Landlords making profits less than £6,725 can choose to make voluntary Class 2 NI payments. One reason for doing so is to ensure you qualify for the full State Pension.
Income from Property You Own Personally
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:
- £2,500 to £9,999 after allowable expenses.
- £10,000 or more before allowable expenses.
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.
How to Declare Unpaid Tax
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.
Income from Property Owned by a Company
Landlords should count rental income from a property owned by a company the same way as any other business income.
Costs You Can Claim
You can reduce income tax by claiming for costs in the normal way. But, there are different tax rules for:
- Commercial Properties
- Residential Properties
- Furnished Holiday Lettings
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:
- Fees for accountants
- Fees for letting agents
- Legal fees for lets of a year or less (or renewing a lease under 50 years)
- Insurance for buildings and its contents
- Property maintenance and repairs (excluding improvements)
- Utility bills (e.g. electricity, gas, water)
- Rent, ground rent, and service charges
- Interest on property loans
- Council Tax
- Cleaning or gardening services
- Certain direct costs of letting the property (e.g. advertising, telephone calls, stationery)
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:
- Beds and sofas
- Carpets and curtains
- Kitchen crockery and cutlery
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:
- The current tax year for individuals and partnerships.
- The 1st of April in the previous tax year for companies.
Furnished Residential Lettings
In some cases you can claim ‘wear and tear allowance‘:
- For the 2015 to 2016 tax year for individuals and partnerships.
- On or before 31st of March 2016 for companies.
Furnished Holiday Lettings
As a rule, you can claim for these items for furnished holiday homes:
- Plant and machinery capital allowances on furniture and furnishings in the let property
- Equipment used outside the property (e.g. tools and vans)
- Capital Gains Tax reliefs
- Business Asset Rollover Relief
- Business Asset Disposal Relief (BADR)
- Relief for gifts of business assets and relief for loans to traders
Note: You can only claim for these reliefs if all these conditions apply to you:
- The property gets offered to let for at least 210 days a year.
- It gets let for more than 105 days a year.
- No single let is over 31 days.
- You charge the going rate ‘market rate’ for similar properties in the same area.
Your profits count as earnings for pension purposes if you own the property personally.
How to Calculate Your Profit
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:
- Add up all your rental income
- Add up all your allowable expenses
- Deduct the expenses from the income
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.
If You Make a Loss
You should deduct any losses from your profit and then enter the figure on your Self Assessment form. You can offset losses against:
- Any future profits (done by carrying it forward to a later year).
- Profits made on other properties (where you have them).
Note: Offsetting losses against future profits must occur in the same business.