Tax rules for landlords in the UK are complex for a number of reasons.
Landlords are subject to a number of different taxes, including income tax, capital gains tax, and stamp duty land tax. Each of these taxes has its own rules, which can be difficult to navigate and can be subject to frequent changes. For example, recent changes to tax relief for mortgage interest payments have had a significant impact on the profitability of buy-to-let properties.
Landlords are required to submit self-assessment tax returns, which can be complex and time-consuming to complete. It is important to ensure that all income and expenses are accurately recorded and that all tax rules and regulations are properly followed. In addition, tax rules for landlords can interact with other areas of law, such as employment law and data protection law. It can be difficult to navigate these interactions and ensure that all legal requirements are met.
The tax rules for rental properties can differ depending on the type of property and the location.
To top it all, there are penalties for non-compliance with tax rules, including fines and even criminal prosecution in some cases.
With this in mind, here's the top 10 questions landlords ask about tax:
1) How much rental income is taxable? Landlords must pay tax on their rental income. The amount of tax you pay depends on your total taxable income, including rental income, and your tax rate. Basic-rate taxpayers (those earning up to £50,000) pay 20% tax on rental income, while higher-rate taxpayers (those earning over £50,000) pay 40% tax on rental income.
2) What deductions and expenses can I claim against my rental income? Landlords can claim a range of deductions and expenses against their rental income, including mortgage interest, letting agent fees, repairs and maintenance costs, insurance, and other expenses related to managing the property. It is important to keep accurate records of all expenses to ensure you can claim them correctly.
3) Can I claim tax relief on mortgage interest payments? Landlords used to be able to claim tax relief on mortgage interest payments in full, but this changed in April 2017. Now, tax relief on mortgage interest is limited to the basic rate of tax (20%). Landlords who are higher-rate taxpayers may see an increase in their tax bill as a result of this change.
4) What are the rules for claiming capital allowances on furnished rental properties? Capital allowances can be claimed on items that are used in the rental property, such as furniture and appliances. However, it is important to note that not all items are eligible for capital allowances, and there are specific rules around what can be claimed. For example, the item must be used solely for the purposes of the rental business.
5) What is the annual tax-free allowance for rental income? The annual tax-free allowance for rental income is called the property income allowance. For the tax year 2022/23, this allowance is £1,000, which means landlords can earn up to £1,000 in rental income without paying tax.
6) Can I carry forward losses from previous tax years? Yes, if you make a loss on your rental property in one tax year, you can carry it forward to offset against future rental profits.
7) What is the process for registering with HMRC as a landlord? Landlords are required to register with HMRC and declare their rental income. You can do this online by completing form SA1.
8) How is tax calculated on rental income earned from multiple properties? If you earn rental income from multiple properties, the income is added together to calculate your total rental income. This is then subject to tax at your appropriate tax rate, taking into account any deductions and expenses you can claim.
9) Are there any special tax considerations for short-term rentals, such as Airbnb rentals? Yes, there are specific tax rules for short-term rentals, such as those through Airbnb. For example, you may need to pay business rates instead of council tax, and you may be required to register for VAT if your earnings exceed a certain threshold.
10) How does capital gains tax work when I sell a rental property? Capital gains tax (CGT) is payable when you sell a rental property. The amount of CGT you pay depends on the sale price of the property, minus any allowable expenses and the original purchase price. The CGT rate is either 18% or 28%, depending on your total taxable income. You may also be able to claim various reliefs, such as letting relief or private residence relief, which can reduce the amount of CGT you pay.
Overall, the complexity of tax rules for landlords in the UK can make it difficult for landlords to manage their finances and ensure they are paying the correct amount of tax. It is important for landlords to seek professional advice and stay up-to-date with any changes to tax legislation that may affect their rental properties.
How we can help you as a landlord:
Purple Accounts is a specialist property accountants and helps landlords across the UK to structure their finances in the most tax efficient way and grow their property business. Our monthly landlord package is perfect for taking control of your finances and also gives you access to over 100 lenders for your property funding - without the need for the bank.