Essential Tax Strategies for Rental Property Owners – TaxTotal

Are you a rental property owner in the UK? Then, you’re likely already well-versed in the ins and outs of the rental market, but have you considered the tax implications of your property investments? Don’t worry – we’re here to help! In this blog post, we’ll introduce you to some tax strategies you can use to help reduce your liabilities and maximize the return on your rental investments. We’ll cover topics such as capital gains tax, inheritance tax, and other tax reliefs that can help you make the most of your rental income. With the right strategies in place, you can ensure that you’re getting the most out of your property investment while keeping as much of your hard-earned money as possible. So read on to learn more about the tax strategies you can use to maximize your rental property profits!

Understanding the Tax Benefits of Owning Rental Property.

If you’re a landlord in the UK, you know that owning rental property comes with a lot of responsibilities. But did you know that there are also tax benefits? In general, rental income is taxed as income, and landlords can claim back expenses related to their rental property.

  • This includes things like repairs, insurance, and management fees. Understanding the tax benefits of owning rental property in the UK can help you make the most of your investment. So it’s essential to understand the rules and regulations.
  • Also, landlords can claim a wear and tear allowance, which covers the cost of replacing furniture and other items on the property. It can be a massive help in keeping your costs low.

This can be a great way to lower the amount of taxes you owe and make the most of your rental income. So, if you’re a landlord in the UK, take advantage of these tax benefits to maximize your profits and help ensure that you get the most out of your rental property. We discuss more about it below.

How to maximize your rental income with Tax Reliefs & Allowances

Letting out a room in your home

You may be eligible for rent-a-room relief for the first £7,500 of income received from renting out a room in your primary residence for the tax year 2021/22 and 2022/23.

Furnished holiday lettings

A furnished holiday rental, which is a property rented to tourists or visitors for a short term. Usually seasonal period, is subject to special rules not covered here. You might find HMRC’s helpsheet (HS253) useful if you earn this type of income.

Property allowance

Individuals with property income are eligible for a property allowance of £1,000. You can find more information below

However, it is not possible to claim both rent-a-room relief and property allowance against the same property income.

Property allowances: how do they work?

The property allowance is £1,000 for people who rent out their properties.

Full relief

For 2022/23, if your total rental income (before expenses) is less than or equal to £1,000. You don’t have to declare it to HMRC or pay any tax. This will apply automatically without any action from you. Nevertheless, you can elect to be taxed on your property the normal way for the income you actually receive.

If your expenses exceed your rental income you can claim the rental loss. However, it is not possible to claim any losses or deductions for property expenses if you use the property allowance relief.

In 2022/23, if your rental income (before expenses) exceeds £1,000, you have the option of deducting the property allowance from your rental income. Rather than actual allowable expenses, or calculating your taxable rental profits the normal way.

Partial relief

Your best option will depend on the level of expenses you have. A partial relief may be more appropriate if there are a few expenses. In other cases, you may be better off claiming actual expenses. Additionally, you may wish to claim actual expenses if the result is a loss on the rental.  If you choose to use the property allowance, you cannot claim any loss or deduction for actual allowable expenses.

What are the rental allowable expenses?

It is basically expenditures, other than capital expenditures, like improvements to the property, that are incurred for rental purposes, e.g. :

  • The cost of repairing and renewing a property so that it can be rented. It is important to note that improvements to a property, such as adding an extension or making it suitable for renting, are not allowable for income tax purposes (but may be for capital gains tax purposes);
  • Insurance costs;
  • The cost of advertising to find a tenant;
  • A letting agreement’s renewal legal costs;
  • Using a letting agent’s fees;
  • Re-decorating;
  • Water and council tax;
  • Interest on loans used to purchase or improve a property. When you have a repayment mortgage, the amount you pay off the loan balance is not an allowable expense. Tax relief on interest is limited, however, and cannot be deducted from rental profits the same way as other expenses.

In addition, you can deduct the actual costs of replacing furnishings, appliances, and kitchenware in the property. You can claim relief if you replace something like-for-like, or with the nearest modern equivalent. You can also claim the costs associated with disposing of the old asset, although anything you receive for it must first be set off against those costs. It is available to all landlords, not just those who rent fully furnished properties.

Is it possible to claim tax relief on interest and other finance costs for my rental property income?

There is a restriction on tax relief for interest and other finance costs on residential properties. We restrict income tax relief to the basic rate.

Most individuals reduce their income tax liability by a basic rate tax reduction when they calculate taxable rental profits, which usually includes interest and other finance costs but not residential property finance costs.

The tax reduction is the lesser of the following (currently 20%):

  • Interest and other finance costs in the appropriate proportion;
  • Profits from property;
  • Total adjusted income.

‘Adjusted total income’ refers to your taxable income after deducting personal allowances but excluding savings and dividends. Calculate the tax reduction based on either the property profits or the adjusted total income, then carry forward the difference between that and the finance costs to future tax years.

Interest on mortgages, loans, overdrafts, and other finance costs 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 on my rental property?

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.

Paying Tax on Rental Property Income.

Paying tax on rental income can be tricky, but it doesn’t have to be. Knowing the rules and regulations, and understanding the process, can help make your life a lot easier. It is a vital part if you are filing your self assessment tax return. You must understand that rental income is taxable and must report it on your income tax return. Depending on your rental income, you may need to pay taxes quarterly or annually. If you are a self-employed landlord, you may also need to pay self-employment tax. You can read more about the rental property income tax rate in our article.

Additionally, you can deduct certain expenses, such as repairs, insurance, or mortgage interest. It is essential to consult with a tax professional to make sure you are taking advantage of all of the deductions that are available to you. Doing your homework, and learning the ins and outs of paying taxes on rental income, can make the process smoother and easier. Feel Free to contact us for any unresolved questions.

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