UK Landlord Tax

If you own an investment property as a landlord, you can expect to pay taxes throughout the investment's lifespan. These taxes include: when you purchase the property, when you rent it, and eventually when you sell or transfer ownership.

 

To put it simply, being a landlord means operating a business, and any profits made from it are subject to taxation. Property taxes, however, require specialized knowledge and can be intricate, especially for new landlords.

 

This blog is designed to assist you in navigating through the taxes landlords pay and provides strategies to decrease your tax obligations.

 

Nevertheless, it's recommended that you seek tailored guidance from a tax expert, ideally one who specialises in buy-to-let taxation, to ensure you're investing in a tax-efficient manner that fits your individual situation.

 

In the meantime, this summary will help you comprehend your tax obligations, allowing you to budget appropriately and avoid any unforeseen tax bills from HMRC.

 

Please keep in mind that this guide provides a broad view of the current tax environment. For a more comprehensive and personalised tax advice that suits your unique needs and situation, it is recommended that you consult a tax specialist.

 

1. What taxes do landlords pay?

 

In the UK, purchasing a property over a specific value requires payment of tax, commonly referred to as 'stamp duty'. However, if the property is not your primary residence and you rent it out, you are also responsible for paying taxes on:

 

• The income generated from rent (income tax)
• Any growth in the property's value during the period of ownership (capital gains tax)

 

While you’re letting property – Income tax on renting income

 

How tax on rental income is calculated

 

If your annual rental profit is above £2,500 or your rental income before allowable expenses is greater than £10,000, you must complete a self assessment tax return. If you earned less than £2,500, you can check whether you need to complete a tax return

 

Your profits from property will then be added to any other earnings to give an overall personal income, on which you then pay income tax at the applicable rate.

 

The expenses you are and aren’t allowed to claim for are complex and are covered in the next section. 

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For the 2022/23 tax year in England and Wales, you’ll be taxed at 20% on earnings falling between the personal allowance of £12,570 and basic rate upper threshold of £50,270, and 40% on any amount between that and £150,000. Earnings over £150,000 will be taxed at 45%. These thresholds are currently* frozen until 2027/8, as announced by the Chancellor in the 2022 Autumn Budget.

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(*If these thresholds change, it’s likely to happen at a budget, so do check the government website for latest updates.)

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You may also have to pay National Insurance, but this can be quite a complex issue, so it’s best to speak to a professional to check your obligations.

 

 

Tax on rental income from multiple properties

Many landlords have several properties. When this is the case, tax liabilities are considered much the same as when running any other business.

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For self assessment, the important thing to note if you have different types of rental, is that income from furnished holiday lets should be reported as a separate figure, as it’s classed as a ‘trade’ and some different tax rules apply.

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UK rental properties, rents and expenses should also be accounted for separately from any overseas rentals let on a long lease. Holiday homes outside the EEA fall into the overseas rental category.

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If you’re completing a paper tax return, the deadline is 31 October each year. Online submissions can be made until midnight on 31 January for the previous year’s return.

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For much more information on how to file your return and make payments, see our article, ‘Tax deadline on 31 January: what landlords need to know’.

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Making Tax Digital

You should already be aware that the Government intends to move everyone over to a new online-only tax filing system through its Making Tax Digital (MTD) plan. This was most recently amended in December 2022.

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This requires individuals and businesses to submit quarterly returns to HMRC via MTD compatible software and it will apply to self-employed individuals and landlords with annual business or property income of:

• more than £50,000 from 6 April 2026
• between £30,000 and £50,000 from April 2027

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If your income is under £30,000, you will not be mandated to use the scheme until a review into how it can be shaped to meet the needs of smaller businesses has been completed.

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If you own property jointly – for example as a married couple – then you can each earn up to the minimum threshold (including any other income) before you need to use MTD. 

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The pilot scheme is up and running, so it’s worth looking into exactly what’s required now and discussing it with a property tax expert so you can make sure you have the most appropriate software ahead of the requirement coming into force. You can also find out more about the pilot scheme and whether you might be eligible to take part in LandlordZONE’s article The MTD pilot – What is it and how do I join it?

 

 

2. What happens if you make a loss?]

 

If your rental income is lower than your allowable expenses in a given year, this is recognised as a tax loss.

 

The loss can be carried forward to the following year and deducted from any available profits. This process must be repeated annually; it is not possible to accumulate losses for later use, such as to avoid being subject to higher rate income tax.

 

3. Expenses - what you can and can’t claim

 

It's crucial for landlords to claim property expenses since each allowable expense incurred can be subtracted from their profits, lowering their tax obligations.

 

Thus, recording every expense related to the rental property and storing every receipt for activities connected to its letting, management, and upkeep is one of the most important administrative tasks for landlords.

 

What things are landlords allowed to claim as expenses?

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Essentially, residential landlords can claim for the day-to-day costs of letting, managing and maintaining their properties.

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The key thing to know is that any expenses you claim as an income tax deduction must have been incurred ‘wholly and exclusively’ for the purpose of running your rental property business. In technical terms, they must also be ‘revenue expenditure’, which means they’re incurred in order to earn income.

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Expenses that are not classed as ‘revenue’ – such as extension or refurbishment that enhances a property’s value – are usually ‘capital’ expenses, which can be deducted from the capital gain when you eventually come to sell the property.

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Revenue expenses include:

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• Business costs – such as phone calls, some travel costs and running a home office
• Fees for services by professionals – e.g. accountants, letting agents, solicitors and surveyors
• Insurance cover, including for buildings, contents, and rent guarantee
• Repairs to and replacement fittings and furnishings for the property
• Maintenance services - e.g. cleaning or gardening
• Ground rent and service charges for leasehold properties
• Utility bills and council tax while the property is unoccupied
• Bad debts (if accounting on an accruals basis)

 

 

While some property expenses are simple and easy to understand, others - particularly those related to business expenses and repairs - can be more intricate. That's why seeking the assistance of a tax specialist to manage your tax returns is highly recommended, particularly if you have multiple rental properties.

 

If you own a holiday rental, the regulations are somewhat different. To ensure you understand which expenses you can and cannot deduct from your profits, it's important to consult a tax advisor and refer to the government website for further information.

 

 

4. Extra tax savings for married couples and civil partners

 

 

5. Staying on top of your landlord tax liabilities

 

Keeping up with the buy to let tax regulations can be complicated, and the rules may change frequently, so it's crucial to ensure that you remain compliant with HMRC.

 

The most effective approach to fulfill your tax obligations and reduce your tax liability is to hire a professional property tax specialist, particularly one who has buy to let clients or is a landlord themselves. They can offer personalised guidance and handle your tax returns on your behalf.

 

Even if you delegate your bookkeeping and tax responsibilities to a professional, being knowledgeable about tax laws can make your discussions with financial and tax advisers more productive.

 

Attending one of NRLA's tax training courses for landlords, such as 'Saving Property Tax,' 'Capital Gains Tax,' and 'Inheritance Tax,' is a great method to acquire a better understanding of tax regulations.

Rental income tax calculator

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If you choose to file your tax return yourself, Which?, working with GoSimpleTax, has an online tax calculator that could be helpful. It lets you select your different sources of income – breaking it down clearly into categories including ‘Employment’, ‘Property’, ‘Furnished Holiday Lettings’ and ‘Rent a room’ - and then takes you through each one, step by step.

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This tool is officially recognised by HMRC and has handy tips throughout that could alert you to allowances and expenses you may have overlooked.

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Click here to access the tool.