If you own a property and rent this out then you must normally pay income tax on any profit. To make sure you stay ahead of the taxman I have put together this simple guide to paying tax on a rental property.
What income must I declare?
- rent you received from your tenant(s)
- any separate sums received for the use of furniture and charges for services normally provided by a landlord, such as cleaning of communal areas, provision of heating and arranging repairs to the property
- if you rent out more than one property then they will be treated together, so any losses on on property can be offset against profits on another
- overseas properties are treated separately from UK properties
What expenses can I deduct from rental income?
- interest paid on a mortgage taken out to purchase the property
- maintenance and repairs to the property but this does not include improvements
- gas, electricity, water rates and council tax
- contents insurance
- legal fees for lets of a year or less and for renewing a lease of less than 50 years
- costs of services such as cleaners or gardener
- letting agents' fees
- ground rents and service charges
- accountant's fees
- other general costs such as advertising, phone calls and stationery
Can I claim for anything else?
If the property is let fully furnished you can claim for wear and tear of furniture and appliances. There are two methods of claiming and you will not be allowed to change the method from year to year.
- renewals allowance - you claim the cost of replacing items less the income received from disposal and the cost of any upgrading of appliance
- wear and tear allowance - claim 10% of the net annual rent (income less expenses) each year
What rate of tax will I pay?
- the tax is paid at the same rate as income tax depending on which tax band you fall into
How do I declare rental income?
- if your rental income exceeds £2,500 you must report this on a Self Assessment tax return
- if you rental income is less than £2,500 you may be allowed to report this on a shortened four page return, contact HMRC for advice
Will I have to pay tax if I sell my rental property?
- you will normally have to pay capital gains tax when you sell a rental property
- if the property is, or has been, your main residence then special rules will apply
For further detailed tax advice you should contact a qualified accountant. I would also recommend clarifying your legal responsibilities as landlord with a qualified solicitor.
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