What do landlords need to know about rental income tax and deductible expenses? And how and when do you need to submit your tax return?
When it comes to working out your rental income tax at the end of the year things can get a little bit complicated. What counts as rental income? What costs are expensable? What tax bracket have you ended up in? What about Capital Gains Tax? What if you make a loss?
We could go on. The list of questions is pretty extensive. And true to their fashion the HMRC, whilst publishing plenty of information on the topic, they haven’t made it as clear or easy to find as they perhaps could have.
In short, your rental income is primarily the rent you receive. However, it more broadly covers all payments from tenants - even if they are expenses and you make no money from them.
For example, you might offer a cleaning service that you outsource but the tenant pays through you. In this example, you would have to log the tenant payment as a rental income and then expense the cost.
Other services like this might include:
If you charge a non-refundable deposit, this also will need to be counted as income as will any money that is kept to cover damages at the end of the tenancy from a returnable deposit. You will then add the costs of damages into your expenses afterwards.
You can also deduct a portion of the interest you pay on your mortgage, however, this relief is being phased out so be sure to check further on this.
A landlord charges £1,000 pm in rent. This includes the tenant's utility bills of £50 pm. This whole amount, despite a portion of it being paid straight to utility companies, would need to be logged as taxable income.
The costs to utility companies would then be added to your expenses.
If at the end of the tenancy, the tenant agrees to forfeit £500 of their deposit to cover repairs to the property, this would count towards the rental income.
So the rental income might be £11,400 for the year. But you would include the utilities they pay you £600, plus the deposit that you don’t return, in this case, £500. Making the total income you would declare for that tax year £12,500. And, you would then deduct the utilities and repair costs as expenses.
If you have more than one property, all rental income and expenses can be lumped together. So expenses on one property can be deducted from the income as a whole not just against that property.
This becomes important if you declare a loss on a property.
However, it’s important to note, that if you own properties personally, as well as a share of a company that profits from letting out properties these will be treated as separate rental businesses. You won’t be allowed to offset the costs of one against the other.
In a similar fashion if you own properties overseas these will be treated separately too. There's a separate section in your tax return for declaring profits from overseas property.
Your rental profits are taxed at the same rate as your business or employment income.
As of 2021 the tax brackets for income tax are:
Your rental income gets grouped together with all of your other income for the year to determine your tax bracket.
So, if you earn £30,000 a year and then earn £12,000 in rental profits your total income would be £42,000 which would mean you’re still in the same tax bracket. However, if you earned £20,000 in rental profits that would push you into a higher tax bracket and you would have to pay 40% on the profits above £50,271.
You must declare your rental income at the end of the tax year. The tax year runs from the 6th of April to the 5th of April.
The deadline for making a paper tax return is 31 October. For an online return the deadline is 31 January the following year.
From 2024 this will be changing as the Government pushes their new Making Tax Digital scheme to landlords and self-employed individuals. You will be required to keep digital records and submit quarterly returns as well as your end-of-year tax return.
If you provide a service that isn’t normally offered by a landlord this may be counted as a trading service. For example, you offer:
This income will be treated separately to the rental income.
If you run a B&B or Hotel then the whole of your income will be treated as a trading income. You can find out more here.
If you rent out a furnished room in your own home you can claim rent a room relief (even if you’re trading).
Find out more about rent a room relief here.
If you haven’t done so already you will need to notify the HMRC of any rental income by 5 October after the end of the tax year ending 5th April. You will need to fill out a tax return. 5th October is also the deadline to notify the HMRC if you have sold a property and declare any taxable capital gains tax.
You can find out more information or begin your tax return online here.
If you declare a loss on your property's income you can set that against future rental income tax.
For example, if, due to various deductible expenses and vacancies, your rental income comes to £6,000 for the year 2021-22, but your expenses come to £8,000 meaning you can declare a loss for the property of £2,000.
The next year, 2022-23, you have increased occupancy and after expenses make a profit of £4,000. You could deduct the previous year's loss from that income meaning you’d only have a total of £2,000 in taxable rental income for that year.
If in this example, you only made £1,000 of profit for the tax year 2022-23, you could carry the remaining £1,000 of losses over to the next tax year 2023-24 as well.
When you sell a rental property you will usually have to pay capital gains tax (CGT). Different rules apply if the property has been your home. The sale of your rental though will be treated in the same way as the sale of any other asset. As it stands you'll currently either pay 18% (if you’re a basic-rate taxpayer) or 28% (if you’re a higher additional-rate taxpayer).
You will need to pay tax on any profits. For example, you bought a house in 2010 for £150,000. And sold it in 2018 for £200,000, you would be liable to pay CGT on the £50,000 profit made.
However, capital gains taxes on the sale of property are expected to change yet again over the coming years so it's a good idea to keep a close eye on this in the coming years. Tax on rental income, it needs to be paid by 31st January online after the end of the tax year of the sale. For more details on capital gains tax, read our guide to capital gains tax on rental properties.
Carefully and accurately tracking your income and expenses is absolutely vital if you want to be able know how much rental income tax you owe and make the most out of allowable expenses to maximise your rental business's profitability. It used to be that this was a time-consuming task that would build up over the course of the month or even year.
However, with property management software like Landlord Studio you can make the most of modern innovations such as open banking to streamline your income and expense tracking.
Additionally, with the new MTD regulations coming into effect soon, now is the perfect time to start looking for a solution to keep digital records if you haven't already. Landlord Studio allows you to use either our desktop portal or our native apps to record income and expenses wherever, whenever.
Connect your bank account to seamlessly view and reconcile transactions in real-time, and easily digitise receipts at the point of sale.
With a lease and tenant tracker built in, the ability to set reminders, and automate communications you'll save time across the whole of your portfolio management. Allowing you to spend more time growing and securing your portfolio for the future and less time worrying about the day-to-day admin.