Whether you’re a professional landlord with several properties or an “accidental” landlord renting out a house that you haven’t quite got around to selling, you’ll need to complete a self-assessment tax return each year.
This means sending a paper return to HMRC by 31 October, or completing an online tax return by 31 January. Clearly the paper deadline has now passed for the 2016/2017 tax year (which ended in April) and the online deadline is almost upon us – so if your return is outstanding, act fast. To submit online, you need a Government Gateway account and your unique taxpayer reference (UTR). Once you’ve filed, you also need to pay tax owed for the 2016/2017 tax year by 31 January.
For the 2017/2018 tax year, the Treasury has began to phase in changes that will eventually see tax relief on landlords’ mortgage and finance costs slashed to 20%. This will eat into the profits of higher earners who previously qualified for relief at 40% or 45%. But for the 2016/2017 tax year, mortgage interest relief can still be claimed in full, and there are several other expenses that landlords can deduct from their income to calculate the profit on which they pay tax.
These include property repairs; advertising costs and letting agents’ fees; legal fees; accountancy fees; ground rent and service charges; buildings and landlord insurance; and any services paid for by the landlord, such as gardening or cleaning. You may also be able to claim tax relief on money spent replacing a “domestic item” used by the tenant in the property, such as a bed, sofa or fridge. But allowable expenses don’t include “capital expenditure” – such as buying or renovating a property.
Don’t leave it all to the last minute
Keep accurate records of expenses throughout the year – it’s much easier than pulling together the information in a last-minute panic. Your records should include the date on which the expense was incurred, the supplier, a description of the expense, and the sum paid, splitting out any VAT. In each case, supporting receipts or statements should be kept. These will normally only be needed if you’re selected for an investigation by HMRC. A small number of landlords are subject to random HMRC investigations each year, but in the majority of cases something will trigger the taxman’s interest in an individual’s tax affairs.
After listing your allowable expenses, subtract them from your rental income to calculate your taxable profit. Rental profits are taxed at the same rates as income from a business or employment: 0%, 20%, 40% or 45%. Some landlords may not make a profit at all. Losses from UK rental properties can be carried forward to set against future profits, but not against other types of income (ie, from a job or pension).
Some landlords will also have to pay class 2 national insurance. This will apply if you make more than £5,965 profit a year and what you do counts as “running a property business”. This will be the case if the following apply: being a landlord is your main job; you rent out more than one property and you’re buying new properties to rent out.
Landlords also have to pay capital-gains tax when a rental property is sold. You should keep details of the date you bought the property; what it cost; the costs of acquisition (for example, solicitor’s and surveyor’s fees); details of any capital improvements; the date of disposal plus costs (such as legal or estate agent’s fees). Letting relief will apply in most cases and, if the landlord lived in the property at any point, private-residence relief too.