You never planned to be a landlord, but if inheriting a property, moving in with someone or a job offer abroad has left you with a home to spare, renting it out might be a wise move. We call people like you accidental landlords, and while letting a home can be lucrative in these days of low savings rates, it also comes with a lot of responsibilities. One of these is paying tax on your rental income, which means making sure you’re registered for self-assessment and that you complete a tax return each year.
If you’re an accidental landlord, and need help understanding the rules about tax on rental income, we’ve pulled together some frequently asked questions that might help.
Yes, you will need to register for self-assessment and file a tax return, if you don’t already do so. You will need to register for self-assessment by 5 October following the tax year in which you received the rental income or you could face a fine.
You will need to pay income tax on the profit from your rental property. This is the amount of money left from the rent after you’ve deducted all allowable expenses – the costs incurred by running your business, such as letting agent fees and insurance premiums.
If you earn more than £10,000 before expenses from your rental property business, or £2,500 after expenses, will need to file a tax return. If your rental income is less than £2,500 you should contact HMRC, as they may collect your tax through PAYE.
How much tax you pay will depend on how much profit you make as well as how much income you receive from other sources, such as your job or a pension.
The taxation bands for rental income are the same as for other forms of income. Be aware that your rental income, added to your personal income, may push you into a higher tax band.
| Band | Taxable Income | Tax Rate |
| Personal Allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £150,000 | 40% |
| Additional rate | over £150,000 | 45% |
Your rental income will mainly come from the rent you receive but it also includes other costs which you pass on to your tenants, such as cleaning and maintenance bills for communal areas and any utility bills, included in the rent. You can deduct these costs as allowable expenses.
You can reduce your tax bill by claiming for some of the expenses which come with renting out property. Allowable expenses are the day-to-day costs of managing your tenancy. Improvement works which add value to your property can’t be claimed for as expenses.
Allowable expenses include:
You can also claim what’s known as ‘relief for replacing domestic items’. This relief applies if you replace furniture, carpets or appliances for use by your tenants – but not when you buy them in the first place.
You can’t claim mortgage repayment costs as an allowable expense. Previously you could claim for the interest element of your mortgage. However, new rules – which became fully-operational in 2020 – mean you can no longer make this claim. Instead, you will receive a tax-credit, based on 20% of your mortgage interest payments.
Each tax year runs from 6 April until 5 April the following year. Rents received in the tax year up to 5 April 2020 need to be included in your online tax return, which must be filed by 31 January 2021. The deadline for paper returns is 31 October 2020.
If you sell your rental property you will have to pay capital gains tax (CGT) on the rise in value of the property, while you have owned it. CGT is charged at 18% for basic rate taxpayers and 28% for those taxed at the higher rate.
You may be able to claim a reduction in the tax you pay if you have lived in the home as your main residence and for any capital improvements you have made – get advice from a chartered accountant.
If you are an accidental landlord, contact us today. We can advise you about the various aspects of renting out a home – including tax – and help find the right tenants for you.
Do you have any questions about the topic above? Our team of experts is here to help in answering any query you may have.
Fueled by his desire to be the best, most reputable estate and lettings agent in town, Steve has spent his career cultivating The Property Shop. Steve prides himself on his authenticity, honesty, and knowledge-base which is emulated by The Property Shop and his team.
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