When you let out your property there are certain tax obligations that you need to be aware of. Whether you are a new or experienced landlord, the tax implications can be complicated, and you may not know where to start.
To help you understand your responsibilities, we have prepared a brief summary of the tax areas you need to think about.
- Rental profits – profits from letting a property form part of your income and are subject to tax in the same way as your other earnings. To calculate your profits you take your total rental income and deduct any allowable expenses. The current rates of income tax are 20%, 40% and 45%.
- Revenue expenses – day-to-day costs associated with maintaining the property or essential to the performance of your duties as a landlord are allowable. Common expenses include: mortgage interest (not capital), property insurance, professional fees, utility costs and advertising. The Government has recently proposed changes to the tax deductions available e.g., for interest.
- Capital expenses – costs that increase the value of your property, such as renovations or building work, are not generally deductible for income tax purposes. You may however be able to obtain relief for these costs when you come to sell the property. Sometimes it can be difficult to tell whether an expense is capital or revenue in nature.
- Record keeping – it is important to keep accurate records of your income and expenditure as this makes it easier to prepare your tax return. It is also a legal requirement to keep adequate records for your rental business, and generally these must be kept for 6 years.
- Registration with HM Revenue & Customs (HMRC) – if you are not already in the self-assessment system, you need to let HMRC know that you have a requirement to file a tax return. The notification should be made by 5 October after the end of the tax year in which you first become a landlord. If you rent a property jointly, both of you will need to file a return.
- Tax returns – these need to be filed with HMRC by 31 January in the year after the tax year. e.g., for income arising in the tax year ended 5 April 2016, the filing deadline is 31 January 2017.
- Payment of tax – tax on profits is due and payable by the filing deadline. Depending on your other sources of income, payment of tax may need to be made in two instalments in advance of the filing deadline.
- Selling the property – when you come to sell you may be liable for capital gains tax on the profit.
If you want any help with your tax affairs, or want to discuss how the proposed changes to the taxation of property income will affect you, please feel free to contact us directly on 0845 177 5500, or using our on-line contact page.