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Tax on Rental Income

Advice for Landlords

With buy-to-let properties being seen as a sound investment, more people are taking their first step into the growing landlord market.

PayStream act on behalf of many landlords, from those who own a single let property to those with extensive property development and letting portfolios.

In this guide, we share with you some of the more frequently asked questions and issues posed by prospective and new landlords.

Rental Income FAQs

The net income you receive from property letting (basically rents less certain expenses) is chargeable to income tax and will usually be treated as being the next slice of your income after earnings.

You should ensure that you retain evidence of the rent which you charge and of all the expenses which you incur. Records may be in paper or electronic format and should be retained for 6 years.

That’s unlikely. Although the tax rules for determining what net ‘profit’ is taxable are very similar to that of say a plumber, a garage or shop, however there are key differences. Only landlords with significant letting portfolios are likely to be regarded as ‘trading’.

No. These sorts of fees are treated as capital expenditure and will be added to the cost price of the property for the calculation of any Capital Gains Tax if and when you sell the property.

Yes. Some modest expenses often get missed. Things like cleaning, gardening, travel and simple repairs, admin and accountancy fees which in isolation may not be significant but when added together can make a difference to your final tax liability.

If you don’t have any other income from additional lettings then no. There is a Property Allowance of up to £1000 pa which would cover this income.

HMRC give a good example in their online Property Toolkit:

Repairs are allowable as a deduction against rental income, whereas any capital expenditure should be claimed against any future Capital Gains Tax when the property is sold.

Repair means the restoration of an asset by replacing subsidiary parts of the whole asset. An example is the cost of replacing damaged roof tiles. However, if the property owner decides to extend the area of the damaged roof or takes off the roof and builds on another storey, this would be a significant improvement of the property beyond its original condition. The expenditure in those circumstances would be regarded as capital.

In that case you would be liable to Capital Gains Tax on the ‘profit’ calculated by deducting the purchase price (plus acquisition costs) from the sale proceeds (less disposal costs). Capital Gains Tax on the sale of residential property is charged at 18% if you are a basic rate taxpayer or 28% if you are a higher rate taxpayer.

Property losses can be set against other property profits you’ve made in the same year (from any other properties you let) or they can be carried forward to the following year.

The rules for calculating tax on your rental income will be the same as for a UK landlord but you are likely to need to register under the HMRC’s Non-Resident Landlords (NRL) Scheme. If you do so you will avoid your letting agent/tenant from having to deduct basic rate tax from the rent paid to you. You will, however, still have to pay UK tax on your net rental income.

Yes. It means that you can only deduct the expenses of the property up to the amount of actual rent you receive. If your expenses exceed that figure and generate a loss you can’t set that loss against profits from any other property letting profits or carry it forward to a later year.

As a general rule, the beneficial owner of the property will be the one who will have to pay tax on the rental income. If the property is jointly held HMRC will look at a 50/50 split and depending upon the income received, you’ll have to pay tax at 40% whilst she may pay nothing on her share. Wherever possible you should look at trying to shift the income wholly to the lower tax individual. However, there are other considerations and you should take further tax/legal advice appropriate to your particular circumstances before you purchase.

HMRC’s view is that there is an underlying principle that the cost of buying a property in good condition is clearly capital expenditure. Hence the cost of buying a dilapidated property and then putting it in good order is also capital expenditure. The reality is that all the costs of refurbishment need to be examined in detail and reasonable decisions taken as to whether the expenditure is capital or revenue.

Yes. There are pros and cons of using a limited company with different tax considerations involved. Much will depend on your particular circumstances as to whether you choose to do so. We recommend that you take bespoke professional advice. For example, PayStream’s Tax Team can provide you with an objective report tailored to your circumstances to help you to decide.

You can in part. You cannot claim a deduction for any capital repayment element but there is relief at the basic rate (20%) available on the interest element. The new rules in place from 2020 effectively restrict relief to 20% which means higher rate taxpayers will lose out. The rules can also cause other tax related issues for basic rate taxpayers who are at or near the higher rate threshold and again may need to take advice as to how to avoid the potential pitfalls.

Depending upon the availability of your prospective home for letting to others and the actual number of weeks for which it is let, you may fall under the Furnished Holiday Lettings tax rules.

These lettings are charged under the property income rules although there are some tax advantages for furnished holiday lettings if specific qualifying conditions are met. For example, capital allowances can be claimed on furniture and furnishings in the property as well as plant and machinery.

Have a look at this HMRC help sheet for more information or take professional advice if you’re not sure whether the letting of your prospective property is likely to meet the conditions.

No. Let’s say that a like-for-like replacement fridge would cost £350 but the new fridge freezer will cost £600. Your claim would be capped at £350. If you have to pay, say £25 for the disposal of the old fridge you can claim that cost.

These are relatively new rules for landlords and they also require that if the old appliance was sold on, you would need to deduct the proceeds of its sale from the replacement claim.

Unfortunately not. The reason is that such expenses are not wholly and exclusively for your new letting business – they are essentially for a private purpose, that of repaying the mortgage in the event of death.

Yes. You can claim the appropriate business proportion but you’ll need to keep full mileage and expenditure details to substantiate your claim. Assuming that you are running your property business from home you should be able to claim the cost of travel to and from home to the properties and for travel between them.

Many landlords decide to claim the HMRC fixed mileage rate as it’s just the mileage records which need to be maintained. However, you can’t switch between the two different methods of claim on the same vehicle.

If you are looking to become a landlord for the first time or are thinking of expanding your existing portfolio, remember that the tax consequence of investing in property is unlikely to be the main driver for your decision but it should still inform that decision.

Do your own research into the rules around the taxation of property and don’t be afraid to take the advice of professionals. Buying property is a major financial commitment and it will pay you to understand how the tax rules work to avoid making a costly mistake.

PayStream’s extensive service for new and existing landlords is available to everyone. Hit the button below to view the details of our Property Portfolio Review service. Alternatively drop our Tax team an email at or call 0161 923 0201 (option 3).

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