You are required to pay income tax on the rent that you collect from the properties that you own if you are a landlord. This article will walk you through the steps of calculating what you owe as well as explain how income tax is applied to rental revenue.
What exactly does a landlord count as income from a rental unit?
Your revenue is comprised mostly of the rent that you collect from your renters; however, it also accounts for any other payments made by tenants for services that are typically provided by a landlord. These are the following:
Maintenance and cleaning of common areas
the monthly costs of utilities, including those for heating, broadband internet, and water
Making arrangements for the property to be repaired
The amount of money that is left over from a returnable deposit after the end of the tenancy is considered rental revenue, as is any money that is kept over from a non-refundable deposit that you charge for your property.
You are eligible to deduct any costs that you incur as a result of renting out the property. In our guide, which covers expenses and allowances that landlords might claim, we explain how this process works.
In addition, you are eligible to deduct a portion of the interest that you pay on your mortgage; but, this tax relief is gradually being eliminated.
Read more about the topic in our guide to the tax relief available for buy-to-let mortgage interest.
What types of revenue from rentals are subject to taxation: an example
For instance, a landlord who sets the rent at £750 a month and includes all of the tenant’s utilities in that price must count the entire sum as revenue (though some of these costs could be charged as expenses).
This amount would be considered part of the rental income if, at the end of the tenancy, the tenant agreed to surrender £500 of their deposit in order to fund the cost of repairing the property. In spite of the fact that the annual rent would be £9,000, the landlord would be required to report their revenue as being $9,500.
On the other hand, the landlord would be entitled to write off as an expense the $500 that was paid for repairs on the property.
A levy levied against rental income derived from more than one property
When you have many properties, you can combine all of the income and costs associated with renting them into a single sum. This allows you to deduct the costs associated with one property from the income associated with another.
However, if you own properties and also own a share of a rental business that profits from letting out properties, it is important to note that these will be treated as two separate rental businesses. Additionally, you will not be permitted to offset losses on one rental business against profits from another rental business. This is because the two rental businesses will be considered to be separate entities.
You are unable to combine your UK vacation rental with your Spanish property because properties located outside of the UK are handled in a manner that is distinct from that of properties located within the UK. A distinct part of your tax return is designated for you to fill out if you have profits from an overseas property.
How much tax will I have to pay on the money I make from my rental property?
Your gains from renting out property are subject to taxation at the same rates as income you receive from your business or employment. These rates can range from 0% to 45%, depending on which tax band the income is in.
When your income from rentals is combined with that from any other sources, you run the risk of falling into a tax category that is more onerous. Take, for instance:
Your employment provides you with an annual salary of £40,000.
You realise a profit of £13,000 from the leasing of a property.
This pushes you beyond the threshold of £50,270 required to pay the higher tax rate in 2022-23.
You’ll have to pay an additional 40 percent tax on the $2,730 that is greater than this amount.
When do I have to start paying taxes on my income from renting out my property?
You are required to submit a tax payment on any earnings that you make during each tax year, which runs from the sixth of April to the fifth of April the following year.
Even if you are not paid until after the end of the tax year, you are still required to report rental income for the year in which it was earned.
It makes no difference whether you pay the bill before or after the end of the tax year when it comes to deducting expenses; you can deduct any permitted expenses that relate to work done for a specific tax year as long as those expenses were incurred within that year.
Rental income vs trading income
If you offer services that are not typically provided by a landlord, such as the following:
a regular cleaning service for rented rooms, a regular laundry service, or frequent meals
In most cases, this revenue will be handled differently than rental income and will be considered trading income instead.
If you own a hotel, bed and breakfast, or guesthouse, the entire amount of your income will be considered to be business income. More information regarding the taxation of income from trading can be found in our guide on working for yourself.
Alternately, if you rent out furnished housing within your own house, you can qualify for the rent-a-room relief programme even if you run a business out of your home.
Putting out a tax return for revenue from rentals
You are required to inform HMRC of any rental income you receive by the 5th of October after the end of the tax year, if you have not already received a tax return (5 April). If you are renting out property and making money from it, you will typically have to file your taxes using the self-assessment method.
The due date for submitting a tax return using paper forms is October 31. The deadline for filing an online return is the 31st of January in the following year.
The primary tax return
If your total income from UK property for the tax year, before deducting costs, was more than £10,000, you are required to fill out the main tax return.
After deducting all of your rental expenses, you need to determine whether or not you are required to file a tax return. If it is determined that you are, then you will need to do so.
If it’s less than £2,500, the HMRC may be able to collect the tax through the PAYE system if you currently pay tax in this manner, such as through your salary or pension, for example. This option is only available if you pay tax in this manner.
For further information, please contact HMRC.
If you earn money from property in the United Kingdom, including holiday lets in the United Kingdom, you’ll need to fill out the pages for UK property. If your property is located outside of the United Kingdom, you’ll need to fill out the pages for foreign property.
If you manage a business like a hotel, guesthouse, or bed and breakfast, you are considered to be self-employed and are required to fill out the pages designated for self-employed people on the tax return.
This also applies to you if portion of your income is considered to be income from trading (see rental income vs trading income, above).
Making a loss declaration on rental income
It is possible to “carry forward” losses from rental properties in the UK in order to offset future earnings from those properties in the UK.
Therefore, if during the tax year 2021-22 you got rental income of £8,000 but had costs (claimable) for £10,000, you would record a loss of £2,000 for the year.
You are not permitted to deduct this amount from your annual tax liability based on income from other sources, such as dividends or pension income, for the duration of the year.
If, on the other hand, you were to go on to make rental profits of £5,000 in the 2022-23 tax year, you would be able to deduct the loss of £2,000 that you had incurred in the previous tax year, which would result in your owing tax on rental profits of just £3,000.
When you sell a rental property, you are required to pay tax on the profit.
When you sell the property that you have been renting out, you will almost always be subject to paying capital gains tax (CGT). If the property is or has been used as your primary residence in the past, additional regulations apply.
If this is not the case, the sale of the property will be viewed in the same manner as the sale of any other asset, and you will be required to pay either 18 percent (if you are a taxpayer at the basic rate) or 28 percent (if you are a taxpayer at the higher or additional rate).
The period of time you have to pay your capital gains tax payment was thirty days beginning on the sixth of April 2020 and ending on the twenty-sixth of October 2021.
People will have sixty days after the 26th of October 2021 to report and pay any capital gains tax owed on the property.