Investing in properties can secure your future financial stability and give you a consistent stream of income. As a property owner, you’ll need to pay the property owner tax on your rental property income, just like with any other source of income.
Property owners have numerous responsibilities, from maintenance duties to managing tenant communications, as well as staying in compliance with rental property tax rules. Getting your head around the UK’s property tax laws can be challenging, and you may prefer to outsource your tax responsibilities to a professional block property management company like Habitare.
We’ll work with you to ensure you pay your taxes on time, avoid penalties, and understand the rental property tax benefits. If you fail to file or pay your property owner tax, you’re at risk of paying penalties amounting to almost 100% of your tax amount.
Let’s look at the tax to pay on property that you’re renting out, and all the available tax relief options that you can take advantage of.
What Tax Do I Pay as a Landlord?
As a property owner in the UK, you’re expected to pay the following taxes:
- Income tax on the profits acquired from your rented property
- Capital gains tax if you sell your rental property
- Council tax if your property is sitting vacant
- Class 2 National Insurance (only if you’re earning profits amounting to more than £12,570 annually)
To calculate your rental income, you need to consider the following:
- Monthly rent
- Cleaning charges
- Hot water charges
- Repairs in the property
- Use of furniture
- Lease bounce, tenancy forfeit, etc.
- Cleaning and landscaping of communal areas
Once you have deducted the expenses from your rental income, you’re left with the profit, and the tax is levied on this amount and not your total rental income.
HMRC requires property owners or managers to maintain detailed records of their finances, which should include rent books, invoices, receipts, bank statements, and mileage logs. You may struggle to accurately keep track of your property income and expenses, but it’s important that you do so, since any discrepancies in the record-keeping process can get you penalised.
When you work with Habitare, we’ll take care of all your finances related to property management. Contact us to learn more.
If you own multiple investment properties, you need to maintain separate records for each property. Additionally, the rules differ if there’s joint ownership of property. We recommend consulting a tax accountant for more information.
Rental Property Tax Benefits Available to Property Owners
HMRC offers a number of rental property tax benefits to landlords, allowing you to save a few extra pounds.
Allowable Expenses
The rental property tax rules allow landlords to deduct a list of allowable expenses from their income to calculate the profits on which the rental income tax is levied.
Allowable expenses include:
- Property maintenance and repair
- Utility bills (gas, electricity, water, and council tax)
- Landlord insurance
- Letting agent and accountant fees
- Legal fees related to tenancy
- Phone bills, stationary, and advertisements related to tenancy
- Service charges
- Vehicle running costs
You can’t class any considerable structural enhancements to your property as a deduction. Your entire mortgage amount, private telephone calls, and personal expenses also can’t be considered under allowable expenses.
Property Allowance
A property owner can deduct £1,000 against the gross rental income as property allowance. However, you can only deduct either allowable expenses or property allowance.
We recommend calculating the amount and checking which one is higher, and using that amount when you’re filing for property owner tax.
Buy-to-Let Tax Relief
When you purchase a buy-to-let property, you can get 20% tax relief on the mortgage interest payment.
Any property rental earning less than £12,571 requires no income tax. If your total income from real estate is less than £50,270, you pay tax at 20% of taxable income. If your income is higher than £50,270 and up to £125,140, you’re required to pay 40% tax on the taxable income. If your income exceeds £125,140, you pay 45% tax.
For instance, if you earned £20,000 in profits in a year, your rental income tax will be 20% of £20,000= £4,000.
Let’s say the mortgage interest payment was £10,000. That means the buy-to-let tax relief would be £2,000.
So, the total rental income tax to be paid in a year would amount to £4000-£2000=£2,000.
When You Run Into Losses
If you make a loss in any tax year on your rental property, you’re not required to pay a tax, and the losses can be offset the next year. For example, if you made a £1200 loss in FY 2021/22, but then made a profit of £4500 in FY 22/23, your next taxable income would be £4,500-£1,200=£3,300.
This is how you calculate your rental income tax.
Capital Gains Tax
If you’re wondering, ‘what tax do I pay as a landlord?’, capital gains tax is another important component to consider. Capital expenditures include adding an extension to your existing property, upgrading any feature, like a security system, heating system or boiler, or purchasing anything new for the property.
These capital expenses can’t be deducted under allowable expenses.
Stamp Duty Land Tax
Stamp duty land tax (SDLT) is something else you pay when you buy an apartment/house or land over a threshold value.
Here’s the current threshold amount for different types of real estate:
- Residential properties: £250,000
- First-time residential property buyer: £425,000 for a property worth £625,000 or less
- Non-residential land/property:£150,000
Contact Habitare for Help with Property-Related Finances
If you’re struggling to understand your property owner tax requirements, you may need professional help. At Habitare, we offer transparent financial management and are extremely thorough with our record-keeping. We’ll log all the data you need to simplify your yearly tax filing and take advantage of all the rental property tax benefits and deductions available to you.
We offer complete property management solutions, so as a property owner, you can relax and leave our experts to manage your daily operations, tenant communications, and financial record-keeping.
Contact us to learn more about our services.