Key Tax Facts for HMO Landlords

HMOs in the UK: A Warm Introduction to Landlord Responsibilities

In the United Kingdom, there is an estimated number of approximately half a million "HMOs" (houses in multiple occupation). An HMO is defined as a rented property where at least three tenants live, forming more than one household and sharing toilet, bathroom, and/or kitchen facilities.

HMOs serve as homes for a diverse range of individuals, creating a welcoming environment for students, unemployed individuals, those with low incomes, recent graduates, young professionals, non-professionals, and individuals who work away from home during the week. These properties offer affordable accommodation options, which contributes to their enduring popularity.

As a responsible HMO landlord, it's essential to be aware of your legal obligations. If your HMO is occupied by five or more individuals, it falls under the category of a "large HMO" and requires a license from the local council (for more information on HMO licenses, please refer to GOV.uk). Additionally, some local councils may also require smaller HMOs to be licensed, so it's advisable to verify the specific requirements in your area.

Within five years of submitting your license application, the council will conduct a risk assessment of your HMO. In the event that any unacceptable risks are identified, it is your responsibility to address them promptly. It's worth noting that tenants have the right to report hazards within your HMO to the local council, which can take necessary action to ensure that any issues are resolved.

Furthermore, it is important to inform the council if you or your tenants plan to make changes to the HMO. This proactive communication helps maintain transparency and ensures that the council is kept informed of any modifications.

Lastly, if there are changes in your tenants' circumstances, such as the arrival of a baby or the adoption of a child, it is your duty to notify the council promptly.

By staying attentive to your legal obligations and fostering a safe and comfortable living environment within your HMO, you contribute to the well-being and satisfaction of your tenants.

Understanding Tax Obligations for HMO Landlords

As a landlord renting out your HMO property, it's important to be aware of the tax implications once your rental income exceeds certain thresholds. However, before being taxed, you have the opportunity to deduct the expenses associated with renting out your HMO, taking into account any applicable tax allowances. The taxable income comprises the profit you make from your HMO, in addition to any other taxable income you may receive.

If you own multiple HMOs or other rental properties, the taxable profits from all properties are combined, along with the associated costs and allowable expenses, to determine the amount of tax owed to HMRC, the UK tax authority. It is crucial to report any income earned from overseas properties separately to HMRC, if applicable.

The first £1,000 you earn from rental income is tax-free, known as the "property allowance." However, if your annual rental property income falls between £1,000 and £2,500, you need to contact HMRC to determine the appropriate reporting procedure.

If your rental income after deducting allowable expenses falls within the range of £2,500 to £9,999 (or £10,000 before deductions), you must report your HMO rental income through Self Assessment, the system used by HMRC to collect Income Tax from landlords and others.

If you are not already filing a Self Assessment tax return, it is necessary to register by the 5th of October following the tax year in which you earned rental income. The UK tax year runs from 6th April to the following 5th April.

To register online for Self Assessment, you can visit the government website GOV.uk. If you have previously filed online, simply sign into your existing Self Assessment tax account. The amount of tax you pay is determined by the expenses and allowances you claim, the amount of HMO rental income you receive, and any other taxable income from various sources such as employment wages, self-employment, or share dividends. Your tax liability is based on the Income Tax band that corresponds to your total taxable income.

No tax is payable until your income exceeds the Personal Allowance threshold (£12,570). However, the Personal Allowance decreases by £1 for every £2 of net income received over £100,000. If your net income reaches £125,140 or more, you do not qualify for the Personal Allowance. Please note that Income Tax bands and rates differ in Scotland.

Unless being a landlord is your primary occupation and you rent out multiple properties while also acquiring new properties for rent (essentially running a professional property rental business), no National Insurance contributions are payable on your rental income.

If you co-own the HMO rental property with others, your tax bill will be calculated based on your share. For example, if your ownership share is 50%, you will be taxed on half of the taxable rental income from the property. Similarly, if you own one-third of the property, you will be taxed on 33.33% of the taxable rental income, and so on.

You can deduct various allowable expenses from your HMO rental income as long as they are solely and exclusively related to renting out the property. If an item is used for both personal and rental purposes (e.g., a mobile phone), you can claim a portion of the expenses, provided you accurately determine the proportion attributed to your activities as an HMO landlord.

Landlords of HMOs often cover water rates, Council Tax, and sometimes gas and electricity for the entire property. These expenses can be claimed as allowable expenses, reducing your taxable profit and tax bill. However, if your HMO tenants themselves pay for these expenses or reimburse you, you cannot claim them as allowable expenses.

Allowable expenses for HMO landlords may also include property maintenance and repair costs (e.g., replacing roof tiles or a door), ground rents and service charges (if applicable), redecorating between tenancies, building, contents and public liability insurance, gardening and cleaning costs, agent fees or management fees, legal fees for short-term lets, accountancy and bookkeeping fees, direct costs such as phone calls, stationery, and advertising for new tenants, and vehicle/fuel costs (only the proportion used for your rental business). Additionally, costs associated with disposing of old furniture or electrical appliances may also be deductible.

It's important to note that mortgage capital repayments cannot be claimed as allowable expenses. Prior to 2017, mortgage interest and other finance costs (such as mortgage arrangement fees) could be deducted from your HMO rental income to reduce your Income Tax liability. However, under the current regulations, a 20% tax credit is provided.

When replacing furnishings or equipment in furnished or part-furnished HMOs, the cost cannot be claimed as an allowable expense. However, you may be eligible for Replacement Domestic Items relief when replacing items such as sofas, beds, carpets, curtains, white goods, crockery, cutlery, etc. The replacement items should be of similar quality, and you can only claim the value of like-for-like replacements.

Please be aware that building extensions, loft conversions, and other structural improvements cannot be claimed as allowable expenses since they increase the property's value (considered a "capital improvement"). However, if you eventually sell the property, you may be able to claim capital expenses against Capital Gains Tax.

To report your HMO rental income, you need to complete and file the SA105 tax form, summarizing your total HMO rental income and the allowable expenses you wish to claim. You must also complete and file the main Self Assessment tax return, the SA100. These submissions provide HMRC with the necessary information to calculate your tax liability.

The deadline for online filing of the Self Assessment tax return is midnight on 31st January, which remains consistent each year. Missing this deadline incurs an immediate £100 fine. Even if you believe there is no tax to pay, if HMRC requests a Self Assessment tax return, you must provide details of your rental income and expenses for the tax year.

The deadlines for paying your tax bill are as follows:

• 31st January for any tax owed from the previous tax year (referred to as a "balancing payment") and your first "payment on account" (advance payments towards your tax bill).
• 31st July for your second payment on account to settle the balance of any tax owed. To assist with budgeting for your tax bill, you have the option to make weekly or monthly payments.

For more official guidance on your responsibilities as an HMO landlord and your tax liability, please visit the government website GOV.uk