You must report income from property rental of more than £2,500 a year on your self-assessment tax return. If you have less than £2,500 you can potentially report it in a more simplified way than through your tax return - please ask us for info.
The amount of income tax you pay on property rental can vary depending upon the type of rental property you own. For the purposes of this illustration we will deal with the most common letting, being residential lettings. If your rental income is from either furnished holiday lettings or commercial property please contact us to discuss further.
You must pay tax on the profit you make from renting out the property, this being income after deductions for ‘allowable expenses’.
Allowable expenses are things you need to spend money on in the day-to-day running of the property, like:
- letting agents’ fees
- buildings and contents insurance
- interest on property loans (i.e. mortgage interest but not capital repayments – from April 2017 this deduction is restricted for higher rate taxpayers - see HERE)
- maintenance and repairs to the property (but not improvements)
- services you pay for, like cleaning or gardening
- other direct costs of letting the property, like phone calls, stationery and advertising
Allowable expenses don’t include ‘capital expenditure’ - like buying a property or renovating it beyond repairs to wear and tear.
Furnished residential lettings
You can claim 10% of the net rent as a ‘wear and tear allowance’ for furniture and equipment you provide with a furnished residential letting. Net rent is the rent received, less any costs you pay that a tenant would usually pay (eg Council Tax).
From 6th April 2016, the above allowance will be replaced, as of this date landlords will only be able to deduct the costs they actually incur on replacing furniture and equipment in the property.
Rental losses
Unfortunately, any losses made on rental properties can only be offset against rental income. In many cases losses can be incurred in the early stages of a buy-to-let business with these eventually being offset against future profits.
Tax Rates
Property income is taxed at the income tax rates shown here (updated for the 17-18 tax year)
There is scope where married to pass some of the profits to your spouse if they pay income tax at lower rates, please contact us if this is relevant to you.
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