Renting out a property – Income tax implications

If you are renting out a property or a room in your house, you might need to register for self-assessment and declare the net profits in your self-assessment tax return, assuming that you are not already doing so.

Some basics:

The rate of tax you pay on the rental income you earn will depend on your total taxable income and your personal financial affairs.

When calculating your net profit, you must include all income and expenses relating to the property in your self-assessment.

What does this mean in practice?

You can either claim the actual expenses incurred on your rental property, supported by receipts or invoices,  or you can claim the fixed property allowance of £1000 per year. You can’t claim both unfortunately, but the property allowance is very useful if you have not maintained a record of property expenses but still want to get the benefit of a deduction.

Expenses are only deductible if it is in the production of earning rental income. The Act talks about wholly and exclusively for the purposes of renting out the property and the expenses should not be of capital nature.

This doesn’t mean that improvements or capital related expenses won’t be deductible for tax purposes since capital expenditure adds to the cost price of the property and will be considered as a tax deduction when the property is sold.

Here are examples of expenses that are deductible off your rental income:

1. General maintenance and repairs of the property.
   Improvements are not included as they are capital in nature.

2. Water, rates, council tax, gas and electricity

3. Insurance including landlord’s insurance and building insurance

4. Cost of service i.e. gardeners, cleaners etc.

5. Letting agents’ fees and management fees

6. Legal fees that relate to the leasing of the property and are not of a capital nature

7. Accountants fees

8. Ground rents, service charges and rental if you need to sub-let

9. Travelling to and from and to the property including mileage rate etc

10. Expenses that might be applicable like phone calls, stationery and advertising cost to get new tenants

The interest and finance costs for individuals renting out properties have changed and are now in full effect. This means that from 2020/2021 you will only be able to claim basic rate relief tax reduction in terms of finance and interest costs on your mortgage.

Things to remember:

• When calculating your property net profit, what needs to be included in your self-assessment?
  The full mortgage repayment isn’t allowed as a deduction. Only the interest portion is allowed and is subject to the basic rate relief tax reduction as explained above

• If you charge your tenants for additional services, the full amount you charge and receive from your tenant should be included in your rental income.

• If you are fixing something on the property and the expense means that the property is being improved, then that expense will be treated as capital expenditure and won’t be allowed as a deduction for income tax purposes. All capital expenditures should be added to the cost of the property and will decrease the capital gains tax when the property is sold.

If you rent out a fully furnished property you are allowed a wear and tear allowance of 10% of the net rent. The net rent is the rental income less things that the tenant would usually pay i.e. council tax and utility bills. The wear and tear allowance covers things like televisions, freezers, curtains etc.

If you claim the wear and tear allowance, then you can’t claim the actual expenses of repairing these items.

If you rent a room out in your house, you can use the rent a room scheme which allows you to earn up to £7500 per year. So, if your rental income is £7500 or less, you don’t need to do anything further or include that income in your self-assessment. 

If your rental property is making a tax loss, you can offset that loss against future profits from the same business i.e. rental income.

If you have more than one rental property, the process is exactly the same, but your income for tax purposes is the net profit from all the properties you let.

Tax affairs surrounding rental income aren’t rocket science, but it is important that you ensure that your calculations are correct so that you don’t pay more income tax than you are due. 

If you have any questions on this, or any other accounting subject, please get in touch with us.