No matter if you are a veteran landlord or someone who is a newcomer to the world of property renting, there are many duties and obligations you have to fulfil.
Handling your taxes can be especially tricky without hiring a property accountant since, as a landlord, you need to consider your rental income along with your other sources of income. If you think you’ve got what it takes, read on. This article will teach you everything you need to know about paying tax on your rental income.
What taxes do landlords pay?
There are three main types of tax: income tax, National Insurance, and VAT. If you’re letting out one or two properties while in full-time employment, you will probably only need to pay income tax on the profit you make from renting your property to a tenant.
The amount of tax you pay primarily depends on how much profit you make. You should consider your circumstances, e.g., how much income you get from other sources (as this determines what tax bracket you are in). The profit is calculated by deducting your allowable expenses from the amount of rental income you receive. In short: rental income – expenses = profits.
As a landlord, you will need to pay income tax on the profit you make from your rental property – this means the amount of money left from the rent you receive after you’ve deducted all allowable expenses—more on those below.
What counts towards your rental income?
Your rental income is made up mainly of the rent you charge for your property, but it also includes charges for additional services you might offer, such as cleaning of communal areas, heating, repairs to the property, and more. This also consists of the non-refundable deposits or any money that is kept over from one.
It does not include money from services that are not generally provided by landlords, such as regular meals, cleaning services, and laundry services. These should be claimed separately as trading income instead of rental income.
Tax benefits for landlords
Landlords are entitled to specific tax relief. Allowable expenses are the day-to-day costs of managing your tenancy. You can deduct the following expenses from your rental income:
- Landlord insurance – buildings, contents and for public liability
- Letting agent and management fees
- Ground rent and service charges
- Cleaning and gardening fees, which you pay for
- Accountants’ fees
- The cost of advertising for tenants
- Stationery and phone calls that are used directly for your property business.
It is essential to keep in mind that some things such as clothing, private phone calls, personal expenses, and home improvement costs are not and cannot be counted towards allowable costs.
When to report your rental property income?
You need to declare your rental income to the HMRC before the deadline following the tax year’s end. The tax year begins on April 6th each year and ends on April 5th the following year. The deadline for online tax returns last till the end of January of the next year.
The deadline for paying tax is the same as the deadline for filing your tax return. So, you must pay any tax you owe for the year up to April by midnight on January 31st, 2021 if you file your tax return online. Anyone filing on paper must complete their return and pay the tax owed by 31 October.
What to do if you’ve failed to report residential income?
If you have undisclosed rental income, you can voluntarily disclose it through the government’s Let Property Campaign.
You may have to pay the penalty, but if you don’t make a voluntary disclosure, and HMRC finds out later, you could receive a higher penalty or face criminal prosecution. The government has a questionnaire to help you decide whether you need to disclose unpaid taxes under this scheme.
Some additional taxes
If you decide to sell a rental property that’s increased in value, you’ll usually have to pay capital gains tax (CGT). It is charged at 18% for basic rate taxpayers and 28% for those taxed at the higher tax bracket (you might be able to claim a deduction in the tax you pay if you have lived in the home as your primary residence).
Additionally, you may be required to pay Class 2 National Insurance tax if your letting activity is deemed running a property business. This might be the case if you let more than one property, being a landlord is your primary job, or you acquire properties to rent them out.
Depending on your earnings, there could be a possibility for you to pay voluntary National Insurance payments as they can contribute towards things such as your entitlement to a full state pension.
Finally, if you purchase more than one residential property, you have to pay 3% on top of the regular Stamp Duty Land Tax (SDLT).
Other financial and legal responsibilities of a landlord
When you’re letting a property, your duties do not end with just paying taxes.
First, you have to inform your mortgage lender that someone other than you will be staying in your place, and perhaps even change the mortgage altogether, depending on the agreement’s length.
As for your legal responsibilities, those include drawing up a legal tenancy agreement. You are also in charge of the safety of gas and electrical appliances you supply and the fire safety of the furniture you are renting. Your duties also include protecting your tenants’ deposits in a government-approved scheme and more.
All of this might seem like too much to handle at once, but as long as you are well informed and prepared, you will be fine.
If your tax affairs are simple, you can register for self–assessment and complete your tax returns online. You will need to be organized with good records and receipts for the rent you have received and your expenses. If you don’t want to risk it, you can always find professional help.