TAX BASICS

Rental Income Tax in UK – What do you need to know?

What Is Rental Income?

Rental income is the money that a property owner receives in exchange for letting another person or business use their property. This income includes rental payments received in advance, late payments, and current payments received. In addition to that, money received for lease cancellations and refunded security deposits are also treated as rental payments. Any extra payments from renters for services that a landlord typically offers. For example, cleaning communal areas, hallways, and utility expenses includes hot water, heating, broadband, and water. Making arrangements for the property’s repairs or, if you charge any non-refundable deposits for your property, all these will be considered in your rental income tax in the UK. As will any money that is leftover from a returnable deposit at the end of the tenant’s lease.

You will be able to deduct expenses incurred as a result of renting out your property. You can also deduct a portion of the interest you pay on a loan if you have a mortgage. However, this is gradually being phased away.

How much tax will I pay on my rental income in UK?

If you are a landlord, you have to pay income tax on any profits you make from your own rental properties. Simply put, your profit is the amount that remains after you’ve totalled up all of your rental income and deducted any expenses or allowances. Furthermore, if you have a mortgage on the home you rent out, you can deduct a portion of the interest you pay on the mortgage from your income.

What is Rental income tax rate?

Rental gains have the same tax rate as business or employment income.It could be 0 per cent, 20 per cent, 40 per cent or 45 per cent, depending on which tax bracket the income falls. However, rental income adds to other income you receive. Which might increase your tax rate. You can check if you need to file for a self-assessment in the government website.

Example

Your employment provides you with a salary of £40,000 each year.

Rental property generates an income of £20,000.

If you earn more than £52,270 in a year, you will be subject to higher-rate tax in 2021-22. 

The excess of £9,730 is subject to a 40% tax rate.

What are the allowable expenses for deduction from rental income tax in UK?

HMRC ‘allows’ rental income taxpayers in the UK to deduct certain expenses from their total income before calculating their tax liability. This includes a variety of expenses, such as: 

  • Professional fees, such as accountants, attorneys, and real estate agents fees 
  • Mortgage and property loan interest 
  • Ground rent
  • Utility bills, such as electricity and water 
  • Council tax 
  • direct expenditures like phone calls, stationery, and advertising for prospective tenants
  • Property maintenance and repairs
  • Landlord Insurance

What if I live on the property as well?

In the event that you live in your rental home, you can be eligible for the Rent-a-Room Scheme, which is one of the best rental income tax-free allowances available to landlords:

There is no tax on the first £7,500 of rental income that you generate. There is no tax on the first £7,500 of rental income that you generate. 

If you earn under this scheme, then you don’t need to file for a Self Assessment tax return.

 You can also benefit from this tax credit if you host on Airbnb or other platforms.

What if I share ownership with my partner?

For unmarried individuals, your rental earnings is based on the percentage of property you own.

Suppose you’re married or in a civil partnership. In that case, you’ll have to split the profits, expenses, and most allowances (with the exception of the personal allowance and the property income allowance) 50/50 between you.

You may also be eligible to receive the Marriage Allowance.

How is tax relief for interest and other finance costs restricted?

Beginning in April 2017, the tax deduction for interest and other financing costs is only available with respect to residential property purchases. Tax reduction is only available to those who pay the basic rate of income tax.

This means that while calculating taxable rental profits. The costs of financing a residential property is not considered. The income tax liability is reduced instead by a basic rate tax reduction – in most cases; this will be the interest and other finance expenses at the basic rate of tax.

The restriction was phased in over the course of the tax years 2017/18 through 2019/20. During the phased period, you could deduct some of your interest and other finance charges when computing your taxable rental profits and use the remaining to calculate your basic rate tax deduction if you qualified.

The tax reduction is the basic rate value (currently 20 per cent) of the lowest of the following: 

  • the appropriate share of interest and other financing charges; 
  • property profits; or 
  • adjusted total income

Personal allowances are deducted from your taxable income after your adjusted total income is calculated. Savings and dividend income, on the other hand, are not deductible. It is not possible to generate a tax refund through the use of property profits or adjusted total income. Therefore, if a tax reduction is calculated using any of these two variables. The difference between them and the finance costs is carried forward to subsequent tax years.

Interest on mortgages, loans, and overdrafts, as well as other financing fees, are subject to the restriction.

When calculating your taxable rental earnings in 2020/21 and following years. You will not be able to deduct any of your interest and other finance costs. From your rental income as you previously could. When calculating your basic rate tax deduction. You must include 100 per cent of your interest and other finance costs in order to deduct them from your taxable income.

How do I calculate my taxable profits?

To calculate the profit or loss for your property rental business, 

add all of the rent received.

+ Add up all allowable expenses.

– Subtract the total expenses from the total rent received.

– Subtract any capital allowances. 

= The taxable profit or allowable loss is the result.

When should I report Tax on Rental Income in UK?

Following the end of the tax year. You must notify the HMRC of your rental revenue by the time set forth in the legislation.

If your income from property rental is less than £2,500 per year, you should contact HMRC, except you report it on an assessment tax return that it is:

After deducting allowable expenses, the range is £2,500 to £9,999.

Before allowable expenses, £10,000 or more.

What happens if I make a loss on my rental income?

If you incur a loss you can then carry forward and offset against earnings from other properties or future profits from the same property rental business in the next tax year. However, you can’t offset it against any other sources of income.

How to avoid or reduce paying rental income taxes in UK?

Attempting to avoid paying taxes is a risky thing to do. If found guilty, you could face significant penalties. However, there are a few legal ways available to lower the amount of payable tax. For example,

  • You can carry forward any losses from the past years.
  • Make sure to claim all permitted expenses in order to reduce net rental income.
  • Transfer ownership with someone, ideally your spouse. Who do not have any income or who is in a low-rate tax bracket. This makes their tax rate for the rental revenue either a basic rate or at zero per cent of the rental income.

What tax do I pay if I sell my rental property?

Suppose the value of your rental property has improved during your time as a buy-to-let landlord. In that case, you will be liable for capital gains tax (CGT) when you decide to sell your property. If you are in the basic tax bracket, any earnings from your sale will be subject to capital gains tax (CGT) at the rate of 18 per cent. If you’re in a higher tax rate, your tax rate will be 28 per cent.

Sidharth Bharthan Menon
CEO, taxtotal​