by Ben Luxon July 31, 2019 6 min read

When it comes to working out your taxes at the end of the year things can get a little bit complicated. What counts as rental income? What 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 as they perhaps could have.

So, we thought we might tackle this for you and see if we can't make it all a little bit clearer.

HMRC resources for your reference:

https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income

https://www.gov.uk/renting-out-a-property/paying-tax

What counts as Rental Income?

In short your rental income is primarily (surprise surprise) 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 which 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:

  • Utility Bills like hot water, heating, gas, etc.
  • Arranging property maintenance.

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.

Easily Manage your Rental Income with the Landlord Studio App.

rental income tax

What rental income is taxable?

An example:

A landlord charges £1,000 pm in rent. This includes the tenants 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 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.

However, you would then deduct the utilities and repair costs as expenses.

What happens with income from multiple properties?

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. 

Related: Mortgage interest restriction (aka section 24) - How to mitigate the tax liability

How much tax should you expect on your rental income?

Your rental profits are taxed at the same rate as your business or employment income.

  • 0% up to £12,500
  • 20% up to £12,501 - £50,000
  • 40% up to £50,001 - £150,000
  • 45% over £150,000

https://www.gov.uk/income-tax-rates

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 any further profits.

When do I pay tax on rental income?

You must declare your rental income at the end of the tax year. The tax year runs from the 6th April top 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.

Related: A Landlords Guide to Making Tax Digital

Rental income vs trading income

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:

  • Room cleaning service
  • Laundry services
  • Meals

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: https://www.gov.uk/guidance/tax-free-allowances-on-property-and-trading-income 

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

Completing a tax return for rental income

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..

Learn more about The Making Tax Digital Scheme that will be affecting all Income Tax by 2021

You can find out more information or begin your tax return online here: https://www.gov.uk/log-in-register-hmrc-online-services

rental income tax

Declaring losses on rental income

If you declare a loss on your properties income you can set that against future profits from your rental income. 

For example, due to various deductible expenses and vacancies your rental income comes to £6,000 for the year 2018-19, but your expenses come to £8,000 meaning you can declare a loss declare a loss for the property of  £2,000.

The next year, 2019-20, you have increased occupancy and after expenses make a profit of £4,000. You could deduct the previous years loss from that number 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 profit for the tax year 2019-20, you could carry the remaining £1,000 of losses over to the next tax year 2020-21 as well.

Paying taxes when you sell a rental property

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. On commercial property you'll pay 10% or 20% CGT depending on your tax bracket, and on commercial you’ll 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, it is worth noting that there is an annual exemption from CGT, which is currently set at £12,000. This can be deducted from the Capital Gain, in this example taking the £50k gain down to £38k. If total gains in the year are under £12k, then there is no CGT to pay, and only 18%/28% on the excess.

Like income tax it needs to paid by 31st January online after the end of the tax year of the sale.

For more details on capital gains tax, review the HMRCs website here: https://www.gov.uk/capital-gains-tax 

We hope you found this blog interesting! However, do note that it should not be used as a substitute for competent legal and/or other advice from a licensed professional.

Call TN Accountancy on 01892 576 550 for professional tax advice on your properties.

Email: enquiries@tnaccountancy.co.uk

or visit their website at www.TNaccountancy.co.uk

Rental income tax accountants

 

Ben Luxon

"Ben is an author and real estate enthusiast. His interest in all things entrepreneurial has led him to work with real estate professionals all over the world, distilling their knowledge into articles and Ebooks. His love of travelling has taken him to over 10 countries in the last year, where he has sampled the craft beer of them all."


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