Rental Properties and Income Tax
Summary of Key Points
- Inform HMRC – Her Majesty’s Revenue and Customs – as soon as you first receive rental income.
- Keep all invoices and good records of costs incurred in relation to your property.
- Consider structuring your mortgages to make full use of the tax relief available on mortgage interest.
- It is normally better to have expenses attached to your rental property and not your home where you have a choice.
- Make sure you have funds available every 31 January and 31 July to pay your tax bills on time.
The “buy to let” market has exploded in recent years. This note will deal with the main financial issues landlords have to deal with. UK tax law deals with four main types of rented property:
- Unfurnished lets – where the property alone is let without any contents.
- Holiday lets – where the property is let to many tenants for short periods.
- “Rent a room” – renting out part of the house you own and are living in.
- Furnished lets – where the property is let along with house fittings furnishings.
This note deals solely with the fourth – and most common – type of let. The tax treatment of the other three is very different. This note is a quick run through the main elements, there are numerous minor details not covered here.
If you’ve only ever paid tax through PAYE, the notion of disclosing information to HMRC will be new to you. Best practice is to write a letter to HMRC as soon as rental income starts coming in to you. They will then send you a tax return to complete shortly after the end of the tax year – 05 April. Failure to disclose the income can result in tax penalties and interest charges for late payment. However, if you make a voluntary disclosure and have made an honest mistake in not declaring the income, HMRC will look on this favourably in comparison to a taxpayer who:
- Appears to them to have deliberately not disclosed the income, or
- Has not made a voluntary disclosure, and HMRC identify the income in some other way – usually when the tenant declares the rental expenditure in some way, for example to the local Council.
On your tax return, if your gross rental income is under £15,000 you only need to include the income and the total expenses you are claiming to arrive at your taxable profit. If your income is over £15,000 then you need to disclose all the expenses separately.
Key Self-Assessment Dates for Tax Year 2023-2024
- 6 April 2023 – start of new tax year
- 5 April 2024 – end of tax year
- 31 July 2023 - first tax payment on account if the last bill for the year was over £1,000
- 31 January 2025 – tax due date
Allowable Expenses – Capital and Revenue
Tax is paid on the taxable profit from the rental, not the gross income. There are some complicated rules on what expenses you can claim and what you can’t. Before going into those in detail, it’s worth bearing in mind that the general principle is that:
- Expenditure deemed to be “Capital” – which arises by nature of owning the property as opposed to running it – is not a tax-deductible expense.
- Expenditure deemed to be “Revenue” – arising from running, maintaining and letting the property – is allowable.
The golden rule is to keep proper records of all the expenses you have in connection with the property. A good accountant can quickly decide whether you are allowed to claim them or not.
Mortgage Interest Payments
If you have an interest-only mortgage on the property, the monthly charges are 100% allowable for basic rate taxpayers. However, if you have a repayment mortgage then only the interest element of the monthly payments are allowable.
The following things are worth considering:
- If you own two properties – one you live in and one you rent – then purely from a tax viewpoint it will be better to have as much as possible of the rented property mortgaged.
- Purely from a tax viewpoint, it is better to have an interest only mortgage on a rented property with a separate vehicle – ISA, pension, etc. – to repay the debt at the end of the term.
“Purely from a tax viewpoint” – there are other considerations than purely the size of your tax bill:
- You may prefer the relative security of a repayment mortgage in today’s volatile financial climate.
- The terms available on a mortgage on your rented property could be so expensive that any tax savings end up being a lot less than the higher interest rates being charged to you by one of our newly risk-averse banks.
If you are a higher rate taxpayer 0% relief is now available.
From time to time you may need to replace or repair things like washbasins, central heating and so on. Although these look a bit “capital” in nature, they are fully tax-deductible providing:
- This is not the first time such things have been installed.
- It is a genuine like for like. So a super-generous landlady installing a new jucuzzi-style bath with gold-plated taps would only be able to claim up to the cost of replacing the ancient old Shanks bath which had gone before it!
Other Tax-Deductible Expenditure
Having dealt with the items which people can trip up on, it remains to list those items which are all claimable as expenses and which rarely cause any problems:
- letting agent's fees
- legal fees for lets of a year or less, or for renewing a lease for less than 50 years
- accountant's fees
- buildings and contents insurance
- repairs to the property (but not improvements)
- utility bills (like gas, water, electricity)
- rent, ground rent, service charges
- Council Tax
- services you pay for, like cleaning or gardening
- other direct costs of letting the property, like phone calls, stationery, advertising
- travelling to the property unless the journey has an ancillary purpose