April 1, 2024 8:01 am

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Nikka Sulton

If you’re a landlord, you’ve got to cough up income tax on the rent you make from your properties. Here’s the lowdown on how you figure out what you owe and how income tax works with rental income.

Basically, as a landlord, you’re on the hook for income tax on any profit you make from your rental properties. Your profit is what’s left after you tally up your rental income and subtract any expenses or allowances.


What counts as rental income for landlords?

Your income primarily comprises rent, along with payments for landlord services like cleaning communal areas and utility bills. Non-refundable deposits and leftover money from returnable deposits count as rental income too.

You can deduct expenses incurred from letting the property. Check our guide for details on expenses and allowances landlords can claim.

Additionally, you can claim a tax credit equal to 20% of your mortgage interest payments. Explore more in our guide to buy-to-let mortgage interest tax relief.


What rental income is taxable: an example

For instance, let’s say a landlord charges £750 per month for rent, covering bills. They’d need to count the entire £750 as income, though some costs could be claimed as expenses.

If, during the tenancy, the tenant agrees to forfeit £500 of their deposit for property repairs, this amount adds to rental income. So, even if the yearly rent totals £9,000, the landlord should declare income as £9,500.

But the landlord can subtract the £500 spent on repairs as an expense.


Tax on rental income from multiple properties

If you own multiple properties, you can combine all rental receipts and expenses. This means expenses from one property can be deducted from receipts from another.

However, if you own properties and also have a share in a rental business, these are treated as separate rental businesses. You can’t offset losses on one against profits from another.

Likewise, overseas properties are treated separately from those in the UK. You can’t merge your UK holiday let with a property in Spain. Your tax return has a separate section for declaring profits from overseas property.



How much tax will I pay on my rental income?

Your rental profits are taxed according to the same rates as your business or employment income – 0%, 20%, 40%, or 45%, depending on your tax band.


Your rental income is added to any other earnings, which could push you into a higher tax bracket. For instance:

  • You earn £40,000 annually from your job.
  • You generate £13,000 in profit from a rental property.
  • This pushes you over the £50,270 threshold for higher-rate tax in 2023-24.
  • You’ll pay 40% tax on the £2,730 exceeding this threshold.


When do I pay tax on rental income?

You’re required to pay tax on your profits for each tax year, spanning from April 6th to April 5th of the following year.

Rental income must be declared for the tax year it’s due, regardless of when you actually receive payment.

Regarding expenses, you can deduct allowable expenses relevant to work conducted within a specific tax year. It doesn’t matter if you settle the bill before or after the tax year ends.


Rental income vs trading income

If you offer services beyond typical landlord duties, like cleaning rooms, laundry, or meals, this income is usually considered trading income rather than rental income.

If you operate a hotel, B&B, or guesthouse, your entire income is treated as trading income. Refer to our guide on filing self-employed tax returns for details on how trading income is taxed.

Alternatively, even if you’re trading, you can still claim rent-a-room relief by letting furnished accommodation within your own home.


Completing a tax return for rental income

If you’re not already receiving a tax return, you need to inform HMRC about any rental income by October 5th after the tax year ends (April 5th). Typically, you’ll have to complete a self-assessment tax return if you earn rental income.

The deadline for paper tax returns is October 31st. For online returns, it’s January 31st of the following year.


Main tax return

If your UK property income totals £10,000 or more before expenses for the tax year, you must fill out the main tax return.

You’ll also require a tax return if your rental income exceeds £2,500 after deducting expenses.

If it’s below £2,500, HMRC might collect tax via the PAYE system if you already pay tax this way, like through your salary or pension. Reach out to HMRC for further details.


Supplementary pages

If your income comes from UK property, including UK holiday lets, you should fill out the UK property pages. If your property is abroad, use the foreign pages.

If you’re operating a trade, like a hotel, guesthouse, or B&B, you’re considered self-employed and should complete the self-employment pages.


FAQ’s about Tax on a Buy to Let Property

Dealing with property tax isn’t any different. Taxes are inevitable in the lucrative property market, cropping up at various stages of buying or moving home.

We often overlook taxes, but if you’re considering a buy-to-let mortgage or property, it’s useful to understand when and where you’ll encounter taxes and how you can save money in the process.


1. Do you pay tax on buy to let property income?

Rental income is taxable. You need to declare any rent from your properties on your Self Assessment tax return. The tax amount depends on your earnings and tax bracket: 20% for basic rate, 40% for higher rate, and 45% for additional rate.

When completing your tax return, you can reduce the amount by deducting allowable expenses. These are costs incurred from being a landlord, such as council tax, insurances, repairs, and legal fees.

New tax laws for landlords were introduced in April 2017. It’s important to stay updated on the latest legislation and proposed changes over the next four years.


2. Do you pay Stamp Duty tax on a buy-to-let property?

Unlike the stamp duty relief for first-time buyers on properties up to £500,000, stamp duty is applicable to buy-to-let properties. The amount depends on the property’s price.


Typical stamp duty rates are as follows:

  • 3% on the first £125,000
  • 5% up to £250,000
  • 8% up to £925,000
  • 13% up to £1.5 million
  • 15% on anything above this

For second properties (not your main residence), expect to pay similar rates. However, the stamp duty paid is deductible from any capital gains upon property sale.


3. Do you pay Capital Gains Tax on a buy to let property?

In brief, yes. If you sell a property for more than you paid, minus costs like stamp duty and legal fees, you’re making a profit, hence the tax. Individuals may have an annual allowance specifically for capital items, separate from the usual income tax allowance. Tax rates vary depending on the capital gain amount.

To reduce Capital Gains Tax (CGT):

  • Include advertising costs, stamp duty, estate agent and solicitor fees, losses on previous buy-to-let property sales, and capital item spending.
  • These expenses can offset your capital gain. Additional tax reliefs may apply based on personal circumstances, like if the property was your main residence.


4. Do you pay Inheritance Tax on a buy to let property?

Inheritance tax varies based on individual circumstances, especially with buy-to-let properties. Such properties are part of your estate, subjecting them to inheritance tax.

If you own the property outright, inheritance tax applies if your estate’s combined value exceeds £325,000. For married couples, the threshold doubles to £650,000, with amounts above taxed at 40%.

Given the complexity of inheritance tax, seeking professional advice is advisable.




More Property Blogs HERE: 

How to Reduce Tax on Rental Income

Challenges of Owning A Second Home

What insurance is needed for a buy-to-let property?

What is the difference between remortgage and refinance UK?

Buy Refurb Refinance Rent (BRRR) Explained

Section 24 Tax Guide for Airbnb Hosts

Can you make money investing in property?

Section 24 Effect on BTL Property

How do you calculate BRRRR?

How do I start a property rental business in the UK?

How to add value to your rental property

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