If you rent out another property, such as a house, flat, shop, caravan, then it is your responsibility to report that income to H M Revenue & Customs and pay the appropriate tax. The amount of tax payable depends on all your other earned income during the tax year which runs up to 5 April.
This income should be reported in the following ways:
- Gross rents less than £1,000, do not have to notify
- Gross rents less than £10,000 and profit less than £2,500 can be given over the telephone.
- Anything outside these amounts needs to be reported on a tax return.
At any point HMRC can request a tax return is prepared to record the profits. The benefit of this being any losses are also recorded and can be offset against future profits.
A new £1,000 flat rate allowance was introduced on 5 April 2017. This gives the option to claim the higher of, the flat rate allowance or the expenses incurred. This flat rate amount cannot create a loss.
Landlords have been hit with many changes which have already been introduced and continue to do so over the next few years, all which have an impact on property taxes, these being:
- Loss of the 10% wear and tear allowance.
- Higher rate stamp duty land tax on the purchase of additional properties.
- The expense for furnishing a property for the first time cannot be claimed.
- Mortgage interest relief is currently being phased in which will increase tax due for higher rate taxpayers.
- Principal private residence relief, which is available on homes which you once lived in will reduce from an additional 18 months to 9 months from April 2020.
- Lettings relief is also being restricted.
Historically, landlords were able to claim for the interest charged on a mortgage used to purchase second property, however this is being removed and is being replaced by mortgage interest relief. A basic rate taxpayer (currently total earning below £46,350) should pay the same amount of tax, although watch out if you are close to this figure, take out the mortgage interest expense and it could put you into a higher rate. Higher rate taxpayers will see a big change to the tax liability.
Example – higher rate tax payer, rental income of £10,000, interest only mortgage £9,000
|Old rules (£)||New rules (£)||New rules real terms|
|Tax @ 40%||4,000|
|Mortgage interest relief (9,000 @ 20%)||(1,800)|
Capital gains tax is payable on the increase in value of the property when you sell it. From this you can deduct any purchase or selling costs, such as estate agent or solicitors fees, as well as the cost for any major repairs or renovations which affect the value of the property. Various reliefs are available if this was a home you once lived in, although as mentioned above these are changing, so if you are considering selling then it may be worthwhile doing that sooner rather than later.
Other things to be aware of as a landlord:
- The new Tenant Fees Bill will ban upfront costs charged by letting agents, such as tenancy renewals and credit check fees
- Check your energy performance certificate is up to date, these are valid for 10 years and was first introduced in 2007.
- You may need to register and pay a fee as a landlord with your local council.
- If your rental income for the year exceeds £10,000 then you will soon have to file digitally every quarter.
We would always recommend seeking advice before buying, renting or selling a second property to assist you in minimising any tax payable.
Chris Barwick Tax Manager – Sheards Accountants