Property investment is a popular venture among full-time employed and self-employed workers. As online accountants, we work with clients all over UK and noticing an increase in property investors. The extra income from renting out one or two properties can make a big difference, and as long as you continue to address your landlord responsibilities, the cash can flow without too much effort on your part.
 
Of course, there are some financial logistics to think about. Calculating your buy to let property income isn’t rocket science, but it helps to know some of the finer details regarding rental income tax. In this article, we will share with you useful information to know about working out your rental income, so that you can make the most out of being a landlord.

What counts as rental income for landlords?

Let’s start by determining what counts as official income for your rented property. As well as the standard rent, there are other payments from tenants for services you might provide as a landlord which would qualify as rental income. These include:

• Utility bills (water, heating, broadband, etc.)

• Cleaning of communal areas

• Arranging repairs to the property
   

Non-refundable deposits will also count as rental income, as will any money that is retained from a refundable deposit. For example, if the tenant agreed to forfeit £200 of their deposit to cover repairs, that extra money would have to be declared by the landlord as income. 

However, assuming that money was used by the landlord to pay for repairs, it can be deducted as an expense - more on that later.  

Rental property accounting - how much tax will I pay?
 
All of the income listed above is subject to tax. Exactly how much you pay depends on the amount of income you generate, as well as your own personal circumstances. 

Rental profit taxes are calculated at the same rate as businesses or regular employment. Depending on which tax band the income falls into, it will be 0%, 20%, 40%, or 45%. 

If you are employed or self-employed, your rental income will be added on to your other income. This means that your rental income could tip you into a higher tax bracket.

Completing a self assessment tax return 

Typically, you will fill out a self-assessment tax return in order to notify HMRC of any rental income. This must be done by 5th October after the end of the relevant tax year (5th April).

Declaring losses

Though it is something that you hopefully will never have to worry about, declaring losses can be beneficial to you in the future, since losses can be carried forward to provide tax relief for the following year. 
For example, let’s say in the 2019/20 tax year you netted a loss of £3,000. You wouldn’t be able to offset this loss against your other sources of income, but you could declare it and have it carried over to the next tax year. If your rental income then profited, say, £5,000 in the 2020/21 tax year, the previous loss of £3,000 would be deducted, netting you £2,000 - exempting you from tax for that year.      

Letting out multiple properties

If you rent out several properties within the UK, the collective income can be lumped together into one neat pile, allowing you to offset expenses from one property from the receipts of another. 

If you own your own property as well as owning a share of a rental business, however, these will be treated as two separate entities, meaning you can’t reconcile losses of one with profits of another. 

Other ways of letting

The rules are slightly different if you’re doing one of the following:

• Renting a room in your home - if you are letting out furnished accommodation in your home, you will be eligible to join the Rent a Room Scheme, which allows you to earn up £7,500 a year tax-free. If you choose not to opt into the scheme, your rental income will be added to your other income as usual. 

• Furnished holiday lettings (FHL) - if you are commercially letting out a furnished property within the UK or the European Economic Area (EEA), you will be able to claim Capital Gains Tax relief, and will be entitled to various allowances. Similar to letting overseas properties, profits from FHLs must be kept separate from other rental businesses.

• Letting a foreign property - Income from overseas properties is counted separately. For example, you won’t be able to offset expenses from a Spanish property from the receipts of one of your UK lettings. On your tax return, there is a section for declaring profits from overseas property.

• Letting a UK property while you live abroad - if you live abroad for 6 months or more per year, you’re classed by HMRC as a ‘non-resident landlord’. You’ll pay tax either via a self-assessment form, or by having it already deducted by your letting agent or tenant.

 
Joint ownership

If you share ownership of a property with other people, the amount of tax you personally pay generally depends on your share of the property. 

Married couples or civil partners who own property together will be taxed in equal shares. If you own unequal shares, tax can be distributed accordingly - you’ll both need to declare beneficial interests in joint property and income. 

If you jointly own property with someone who is not a spouse or civil partner, your rental profits, losses, and tax allocation will depend on your share of the property - unless you both agree otherwise. 

Claiming expenses

When working out your taxable rented profit, you will be able to deduct expenses from your income, meaning you could pay less tax. 

The expenses must have been incurred wholly and exclusively for the purposes of renting out the property. If the expense is used, in any way, separately from your property rental business, then it sadly won’t fly with HMRC. 

For example, if you buy cleaning products for your own home, and use them to clean your rented property, you won’t be able to claim them as an expense, since they were also used for your own home.  

On the bright side, the list of things for which you can have an expense deduction is quite extensive. Here are a few examples of claimable expenses:

• General maintenance, repair, and upkeep of the property (but not improvements)

• Council tax and utility bills

• Landlord specific insurance

• Cost of services (gardeners, cleaners etc.

• Letting agent, accountant, and legal fees

• Costs of advertising for new tenants

• Vehicle running costs (only the miles used directly for your rental property business)

• Phone costs for calls directly related to your rental property business

Capital expenditure

Capital expenses include anything that is purchased for your property or business that will be used over an extensive period of time. Adding something new to the property, improving or upgrading something that was existing, and purchasing new furnishings for the property are all classed as capital expenditure. 

These kinds of expenses are not claimable against your rental income. However, it’s always worth keeping a record of them; if you sell your property in the future, you might be able to set them against Capital Gains Tax.

Working out your taxable profits

With all of this established, working out your taxable profits is actually very simple. Assuming that all of your properties are in the UK:

1.    Add together all of your rental income
2.    Work out all of your allowable expenses
3.    Deduct the expense value away from the income

Add this final value onto your other income, and with this figure, you’ll quickly be able to check which tax-band you fall into.   

What records do you need to keep 

The process of working out your rental income will be a thousand times easier if you keep accurate records of rent received and expenses incurred. In fact, HMRC legally requires you to keep readable, accurate, and complete records for at least 5 years after the tax return deadline of each tax year.  

The main things you’ll want to keep track of are:

• Rent books

• Invoices

• Bank statements

• Receipts

• Mileage logs and phone call logs (if you wish to claim these as expenses)

Other useful information
 
Small profits

If you are also employed and your rental profits are small enough, you can ask HMRC to handle your profits by adjusting your PAYE code. This would mean that you wouldn’t have to fill out a self assessment tax form for as long as your profits remain below the threshold. 

If your profits are £10,000 or more before expenses, or £2,500 or more after expenses, they will ask you to report your profits on a self assessment tax form.

Rental income vs. trading income

When it comes to figuring out your specific rental property profits, there is an important distinction to be made between rental income and trading income. 

For instance, if you provide services that are not typically offered by a landlord, such as laundry service or regular meals, the income generated from these services will be classed as trading income - separate from rental income.

If you are running a hotel, B&B, or guesthouse, all of the income generated is classed as trading income. 

Registering for self-assessment 

If it’s your first year of renting out property, you’ll need to register for self assessment by the 5th October following the tax year you had rental income. If you don’t do this, HMRC could charge you a penalty. Make sure you give yourself enough time to complete it by the deadline!

If you are unsure how to register, contact us today! We charge a small fee for self assessment registration of £25.00 + VAT. 

If you stop renting property / sell a rented property

When you end your rental business, any losses from previous years which you have carried forward will be lost; you won’t be able to set them against other forms of income. However, you may be able to set these losses against any new property which you let out, provided you start renting again within 3 years.

If you are selling a property you have been letting, you will likely have to pay a Capital Gains Tax (CGT). In most cases, the sale of this property is treated the same as the sale of any other asset, requiring you to pay either 18% as a basic-rate taxpayer, or 28% if you’re an additional-rate taxpayer).