Everything you need to know about landlord tax relief rules and recent changes

As a landlord there are a number of taxes associated with buying, owning, and operating a rental property. Understanding the nuances of landlord tax can be challenging, and with the numerous tasks involved in managing a property, it can be tempting to leave the issue of tax until later. However, grasping the topic is essential for maximising profits and avoiding pitfalls that could see you paying far more than you need to at tax time. 

This article serves as a beginner's guide to landlord tax relief, providing insights into the regulations for this year's return and changes to look out for in 2023.

About taxes on rental properties

Landlords are subject to a number of taxes related to owning and renting out a buy-to-let property.

The three main ones are stamp duty tax, income tax, and capital gains tax (though there may also be other taxes associated with your property ownershipsuch as council tax). 

• Stamp duty tax will be owed when purchasing a property. 
• Income tax is then payable on any income earned through renting the property out.
• Capital gains tax is charged on the gains made when selling the property. 

Landlords who manage their properties through a limited company are also subject to corporation tax.

Read our article A Landlords Guide to Tax on Rental Income.

Tax-free income and buy to let tax relief

Landlords have the right to a tax-free property allowance of £1,000. However, if your earnings surpass this threshold you must inform HMRC by submitting a tax return.

The quantity or percentage of income tax you are required to pay is dependent on your earnings. During the current tax year (2022-2023), the tax-free income limit is £12,570. 

Income tax rates

Rental income is based at the standard income tax rates.

• If you make between £12,571 and £50,270, you are subject to a basic tax rate of 20%. 
• If you earn over £50,270, you are subject to a higher tax rate of 40% on any earnings between £50,271 and £150,000. 
• Those who make over £150,000 are subject to a tax rate of 45% on any income above £150,000.

If you own several rental properties, the profits from all of them are combined into one amount.

Landlord tax relief: Under certain circumstances, it is possible to transfer allowances within a marriage or civil partnership, or in a business partnership, as long as it is evident where all of the funds are being directed. This is a form of tax relief.

Self-employed landlords: If you are a self-employed landlord, you are eligible for a trading allowance of £1,000, which allows you to claim a fixed amount for business expenditures instead of calculating them individually. However, this option is not available for limited companies. 

Generally, the trading allowance is primarily utilised by low-income businesses because those with higher income will typically have expenses exceeding £1,000.

Read our article The Ultimate Guide to Self-Assessment Tax Returns for Landlords.

Allowable property expenses: what can and can’t be claimed

Allowable expenses

Allowable expenses for landlords can be bracketed into five main categories. For an expense to be claimable against your buy-to-let income it must be used ‘wholly and exclusively’ for the management of your property. In this context wholly and exclusively means that the expense cannot also be used for personal or other business use. For example, if you buy office equipment, if you use this equipment for your personal use it would no longer qualify as an allowable expense.

These main five categories are:

• General business expenses – For example, office expenses, travel costs such as petrol, phone and broadband, marketing and letting agents’ fees
• Professional fees – For example, your accountant fees, costs of surveyors, solicitors,  building insurance, and content and rent protection cover.
• Service fees – For example, gardening costs, cleaning, decorating, and building services
• Repairs – Only repairs or replacements that do not count as an improvement to the property. Expenses that count as improvements are not allowable.
• Property charges – For example, council tax, and utility bills.

Non-allowable expenses

Many costs incurred when running a buy-to-let property, however, are not allowable expenses. This includes:

• Improvements – work done to the property or costs incurred that improve the value of the property are not allowable. This includes things like new furniture or appliances or extensions to the property.
• Restoration – If you buy a property that is not in a rentable condition the costs to make it rentable are not allowable buy-to-let expenses.
• Interest payments – buy-to-let tax relief on the interest of finances for buying a buy-to-let property has been replaced with a tax credit under section 24 tax changes.

Read our article Top 5 Allowable Expenses Landlords Miss at Tax Time

Recent changes to income tax and landlord tax relief

What are the changes to income tax for 2022-23?

As a result of the pandemic, the basic and higher rate thresholds for income tax were halted and will continue to be frozen in the 2023-24 fiscal year, meaning that no changes to income tax are anticipated for the time being. The purpose of this freeze was to assist the UK economy in rebounding from the effects of Covid-19. When tax bands are frozen, it causes some individuals to be pushed into a higher tax bracket as their income increases.

What are the tax changes for dividend payments?

In 2022, there was an adjustment made to the tax rate for dividend payments, which affects only those who own a limited company and compensate themselves with dividends, not sole traders. If you operate your landlord enterprise through a limited company, it is important to note that the dividend tax rate increased by 1.25% in April 2022. 

However, there is still a £2,000 annual dividend allowance, which means that you do not have to pay tax on dividends below that amount. For amounts exceeding this threshold, the new tax rates are as follows: 

• 8.75% for basic rate taxpayers, 
• 33.75% for higher rate taxpayers, 
• and 39.35% for additional rate taxpayers.

About the 2020 changes to landlord tax relief

The section 24 tax changes mean that one of the key expenses previously allowed to landlords can no longer be deducted. Previously, landlords could subtract mortgage interest payments as a permitted expense from their rental income. However, this was been phased out and as of 2020 landlords can no longer deduct any of their mortgage interest payments from their taxable income.

Instead, they can claim back a landlord tax relief equal to 20% on the lowest of three figures: 

• finance costs (such as mortgage interest payments and loan repayments), 
• profit from rental income after subtracting permitted expenses, 
• or total income after taking into account losses and tax relief. 

For most landlords, the lowest of these will be the finance costs. Meaning effectively, you can reclaim 20% of the cost of your mortgage interest back. This change is most likely to affect higher earning income, as not deducting the interest expense before declaring their income could easily push them into a higher tax bracket.

How can landlords save time and money with Landlord Studio

The changing landscape of landlord tax relief and regulations can make it challenging to keep track of expenses and avoid overpaying taxes. Claiming legitimate expenses is essential, but sifting through bank statements to identify all costs can be time-consuming and overwhelming. 

Fortunately, Landlord Studio offers an easy solution for landlords. With our platform, our default income and expense categories are in line with HMRC tax requirements. We have a range of time-saving automation features designed to help you do away with manual data entry for faster and more accurate rental accounting. 

With bank feeds you can connect your bank account to view and reconcile in real-time. We will automatically recognise and match existing transactions, and you can create custom rules to one-click reconcile regular transactions. Plus, with our receipt scanner, automated mileage tracker, and mobile app, keeping on top of your books has never been easier. 

Track all of your income and expenses in one place and receive automatic reminders if a payment is missed. Simplify your tax process and maximise your profits with Landlord Studio.