It was Benjamin Franklin that famously said, “in this world nothing can be said to be certain, except death and taxes”.
Unfortunately, never a truer word been spoken.
Before delving into the morbid world of BTL & Landlord taxes, I need to shuffle through the customary disclaimers:
Homeview is not a professional tax accountant or legal professional. Whilst we’ve prepared the information in this leaflet with care and have made every attempt to ensure that the information at the time of publication is accurate, this information shouldn’t be relied upon as a substitute for formal/professional advice.
As we are based in England, as are the properties we let and manage, and since England share the same taxation rules as Wales, that means most of the finer details on this page will only be applicable to landlords in England & Wales. However, the general rules and principles are typically relevant to the whole of the UK.
- Paying Tax On Rental Income
- Income Tax Rates for Landlords
- Completing your property/landlord tax return
- Should I use a professional property tax accountant?
- How to calculate your accounts/profits
- Do you still need to file a tax return if you’re not making any profit from your rental property?
- Landlord expenses that are tax deductible
- What about mortgages? Can I offset my mortgage payments?
- How to avoid paying tax on Rental Income
- How to reduce & minimise landlord running costs
- Paying Tax on Rental Income- do I need to pay?
To put simply, being a landlord is a business, so that means any profit made is subject to taxation.
This can work in two ways…
1) Most landlords will be subject to income tax; that means they’ll need to file a Self-Assessment tax return form for each tax year. For more information, we recommend visiting the official GOV.UK website.
2) Many professional and ‘portfolio landlords’ operate their BTL empire through a Limited company (because it can be more tax efficient), and they’ll be subject to business taxation rules, which is a whole different and messy ball game. We work closely with accountants who are able to advise further on this matter, should you wish to opt for the limited company route.
Since most of the landlords that are operating their portfolio under a company will be a ‘professional landlord’ and have their own accountants crunching the numbers, the information in this leaflet will be catering for the part-time and average landlord who will need to complete a Self-Assessment tax return.
Income Tax Rates for Landlords
Even though we’ve titled this section “Income Tax Rates for Landlords”, the “for landlords” part is irrelevant, because landlords are subject to the same income tax rates as everyone else.
For most of us, being a landlord is a ‘part-time’ job; we usually have a full-time job, which is how we earn the majority of our income. Your rental income should be added to any other sources of income, and that total will determine which tax bracket you fall into.
Here are the Income Tax rates and bands on the day of writing this (August 2017):
|Band||Taxable Income||Tax rate|
|Personal Allowance||Up to £11,500||0%|
|Basic rate||£11,501 to £45,000||20%|
|Higher rate||£45,001 to £150,000||40%|
|Additional rate||over £150,000||45%|
For the latest rates, you may want to check the information on the GOV.UK website.
Completing your property/landlord tax return
Word of warning, you should inform HM Revenue and Customs (HMRC) as soon as you start letting a property, even if you’re not making any money.
For the last couple of years, HMRC have been vocal about clamping down on landlords that have been failing to declare their rental gains.
If you’re concerned that owe tax from previous years, then you should contact HMRC directly– their website says that a confession entitles you to leniency.
Golden tip: ensure that you refer to the self-assessment tax return property notes prior to completing your return, it provides you with details of how to complete the property pages of your tax return but also effectively provides you with a simple checklist of all the expenses you should have considered when preparing your return.
Should I use a professional property tax accountant?
We are firm advocates of obtaining professional advice when you need it.
If anyone is in doubt as to whether they could benefit from professional advice then go and see a professional to ask them what value they could add to your business. Many tax accountants provide free initial consultations and will be able to advise clients of ways to mitigate their tax exposure and plan for the future that they would not otherwise have known.
How to calculate your accounts/profits
Income and expenses from property are assessed as a ‘single letting’ business, so whether you let one or multiple properties, you’re taxed on the overall net profit from all properties, as opposed to individual property.
This is relatively easy to work out:
- Add together all your rental income (for ALL let properties)
- Add together all your expenses income
- Subtract your expenses away from your income
Note, the ‘tax year’ runs from 6th April to 5th April the following year. So, your total income and expenses should be calculated between those dates.
Do you still need to file a tax return if you’re not making any profit from your rental property?
It’s quite common to make a loss when renting your property, particularly in the current climate and at the early stages of letting.
Many landlords invest in property as a long-term investment, and they largely rely on house prices increasing, which typically doesn’t happen until years after the initial purchase.
However, even if you’re making a loss, or very little profit (which keeps you below the taxable threshold), you should still complete a Self-Assessment tax return!
Landlord expenses that are tax deductible
The ongoing running costs of being a landlord can be hefty, but the good thing is that many of those expenses are tax deductible, commonly known as ‘allowable expenses’
In fact, many landlords end up paying a lot more tax than they need to because they don’t efficiently offset their taxes against their expenses in order to lower the overall ‘net’ profit.
Here’s a list of ‘allowable expenses’ as listed on the GOV.UK website:
- Letting agents’ fees
- Legal fees e.g. tenant eviction costs
- Accountants’ fees
- Buildings and contents insurance
- *Maintenance and repairs to the property (but not improvements)
- Utility bills, like gas, water and electricity
- Rent, ground rent, service charges for leasehold properties
- Council Tax
- Services you pay for, like cleaning or gardening
- Other direct costs of letting the property, like phone calls, stationery and advertising to find tenants
- *Allowable expenses don’t include ‘capital expenditure’ – like buying a property or renovating it beyond repairs for wear and tear.
Here are a couple more expenses that I’ve offset against my income:
- Rent Insurance
- Any expenses related to landlord regulations, including Gas Safety Certificates/checks, EPC’s, Smoke & Carbon Monoxide Alarms etc.
- Landlord Software
- Eviction services
- Tools & materials required to assist with maintenance & repairs.
- Replacing/fixing furniture and white goods.
On a side note, many landlords benefited from a ‘10% wear and tear tax allowance’ (which you may have heard of)- unfortunately that has been abolished.
Golden tip: save all your receipts and account for every single penny spent on your BTL’s, even small items like a pack of nails. Every penny quickly adds up and can even push you below certain tax bands.
Additionally, we recently received advice from a specialist tax accountant who said that the biggest mistake landlords make when doing their taxes is not keeping detailed records of the business income and expenditure. HMRC have the power to call upon records in the event of an enquiry and penalties can arise if supporting evidence is not made available.
What about mortgages? Can I offset my mortgage payments?
Did you notice mortgage payments (specifically the ‘interest’ on mortgages) wasn’t in the list of ‘allowable expenses’? Unfortunately, that wasn’t a mistake.
It’s a bit of a sore subject for many landlords! But we’ll side-step the politics, and focus on what you need to know…
Starting from the April 2017 tax year, a new tax legislation (Section 24) will start rolling out, which ultimately means landlords won’t be able to offset the interest from any loan (e.g. mortgages, overdrafts, loans to buy furnishings) anymore. The restriction will be phased in gradually from 6th April 2017 and will be fully in place from 6 April 2020.
Of course, this change will mostly affect landlords with large mortgage debt.
For now, during the transitional period, you’ll still be able to deduct some of the interest on your loans. However, these deductions will be gradually withdrawn and replaced with a basic rate relief tax reduction.
The following table shows how the legislation will get rolled out:
|Tax Year||Percentage of finance costs deductible from rental income||Percentage of basic rate tax reduction|
|2017 – 2018||75%||25%|
|2018 – 2019||50%||50%|
|2019 – 2020||25%||75%|
|2020 – 2021||0%||100%|
More details available on this page over at the GOV.UK website.
How to avoid paying tax on rental income
If you plan on making a profit, you can’t, and you shouldn’t.
We find it alarming when landlords look into completely avoiding paying tax in their rental income.
Assuming you’re above the minimal taxable threshold, the best you can do is minimise the amount of tax you pay. If you’re looking to completely avoid paying tax, you’re mostly creeping into ‘tax evasion’ territory, which by definition is “the illegal non-payment or underpayment of tax.”
How to reduce & minimise landlord running costs
While taking advantage of every “allowable expense” is crucial to maximising profits, it’s even more important to keep the overall running costs of a BTL down in the first place.
Spending less by being a savvy consumer (not to be confused with being careless and cheap!!!) coupled with offsetting as many expenses is the key to maximising profits