A Landlord’s Guide to Property Taxation

2nd January 2019

A Landlord’s Guide to Property Taxation

As with many areas of UK tax law, the taxation of rental property income is complex. Before we look at the rules, bear in mind that you need to let HMRC know if you have undeclared property income. At the moment, as the new tax rules come in, the Government is running a form of amnesty for landlords who let them know about undeclared property income. However, if HMRC finds out about undeclared income before you tell them, they can look at your records over the last 20 years and can charge you not only all of that tax but a penalty of up to 100%. If you disclose undeclared income you just get a 20% maximum penalty, under the Government’s Let Property campaign.

Clearly, the total amount of tax that you need to pay will depend on other income, not just your rental profit. However, this guide should help you work out what expenses you can offset and what tax you are liable for.

Mortgage or Loan Interest

Previously, you could offset loan interest. However, that relief is in the process of being restricted in stages. This began in April 2017 and will continue until April 2020. During the four year transition period, the amount of interest you can deduct will go down by 25% a year.

In the tax year 2018-19 you can deduct 50% of the finance costs In 2019-20 this will be reduced to 25% In 2021, the relief will be replaced with a basic Tax Reduction for landlords

Rental Income

You’ll need to include any extra payments you receive, for example, charges for services such as heating, hot water, cleaning and so forth.

If you are a landlord renting out several properties, you need to consolidate all of your rental income and all of your expenses and treat them as one business. So you can’t offset a loss at one property against a profit somewhere else, except in the aggregate.

Allowances and Expenses

As of April 2017, you can get a tax free allowance of £1,000 a year against your property income. If your income from renting property is under £1,000 you don’t need to tell HMRC. However, if it’s over £1,000 you must declare everything. The £1,000 allowance doesn’t apply if you are letting a room in your own house under the rent a room scheme.

If your income from renting out a property is between £1,000 and £2,500, you have to tell HMRC but you may not necessarily have to complete a self-assessment tax return. You must complete a self-assessment return if, after your allowances, your income is between £2,500 and £9,999.

You can’t get any allowance against income tax for capital improvements, such as putting in heating. You may, however, be able to set them off against any capital gains tax bill when you sell the property. Do note that the Government’s idea of what counts as a capital expense is quite specific. HMRC have a list of allowances online, as well as advice on allowance thresholds and record keeping.

Property developers should note that if you buy a property for renovation and have to spend money on it to get it ready to let out, these will count as capital works, not allowable expenses against rental income.

Claiming Maintenance and Repairs

The HMRC definition of a repair is restoring something to its original condition. If you were to replace a wooden window with a double glazed window, that counts as a repair not a capital improvement. On the HMRC guidance pages, there are examples of maintenance and repair costs you can claim for [3]. You can’t claim for replacing equipment or furnishings. However, there is a new Domestic Items Relief that might apply to these [4]. Baths, toilets and washbasins are normally allowable items as they are considered to be repairs.

Allowances for crockery, cutlery, bed linen and so on are also available, provided that the items have a low value and need to be replaced more or less every year in order to qualify. Wear and tear allowance went out in 2016 and was replaced by this relief.

As well as maintenance and repairs, you can offset the following expenses against your rent:

  • Ground rent, service charges and rent
  • Council tax bills
  • Services such as gardening and cleaning
  • Bills for utilities
  • Direct business expenses such as advertising
  • Mileage – provided that you’re not a limited company, the flat rate is 10,000 miles at 45p and 25p a mile after that (car rates)
  • Any training you need to take as a landlord
  • Letting agent fees
  • Legal fees for renewing a lease which has less than 50 years to run
  • Contents and buildings insurance
  • Interest on loans (but note the changes outlined above)
  • Maintenance and repairs (note the restrictions explained above)

How to work out your profits

Simply add up all of your rental income, then add up all of your allowable expenses and deduct the expenses from the income. You must do this across your entire portfolio, not for individual properties.

You may be making a loss on your property or properties. If so, you’ll need to deduct a loss from the profit but declare the loss on your self-assessment form. You may be able to offset some losses against profits in the future.

It is essential to keep up to date with changes, so check the rules regularly, particularly after a budget. Landlords appear to be the subject of constant changes in taxation and revenue rules at the moment, so it pays to read the summaries of the budget every year.