Landlord Accounting & Tax
Whether you’re self employed or operating as a Limited Company, you’re required to keep accurate records of rent received & expenses incurred, to work out the profit you’ll pay tax on. Many expenses incurred are tax deductible, so make sure you keep & record all relevant receipts / invoices to reduce your net profit. This counts for your start-up costs too, things like estate agents fees, landlord insurance & travel costs for your trips to & from your rental property. It all adds up! Separate your income from fully-furnished lettings and unfurnished or part-furnished lettings. You must keep your records for at least 5 years after the 31 January tax return deadline for each tax year
HMRC can charge you a penalty if your records are not accurate, complete & readable or if you do not keep them for the required period of time.
Allowable Expenses: Residential
You can deduct expenses from your rental income when you work out your taxable rental profit as long as they are wholly and exclusively for the purposes of renting out the property. For residential properties the following are deductible expenses:
Letting agents’ fees, legal fees for lets of a year or less, or for renewing a lease for less than 50 years, accountants’ fees, buildings & contents insurance, maintenance & repairs to the property (but not improvements), utility bills, like gas, water & electricity, rent, ground rent, service charges, Council Tax, services you pay for such as cleaning or gardening, other direct costs of letting the property for example phone calls, stationery & advertising
allowable expenses do not include ‘capital expenditure’ - like buying a property or renovating it beyond repairs for wear and tear
You may be able to claim tax relief on money spent on replacing a ‘domestic item’. Domestic items include: beds, sofas, curtains, carpets, fridges, crockery & cutlery
You work out the net profit or loss for all your property lettings (except furnished holiday lettings) as if it’s a single business. To do this, you:
add together all your rental income
add together all your allowable expenses
take the expenses away from the income
Work out the profit or loss from furnished holiday lettings separately from any other rental business to make sure you only claim these tax advantages for eligible properties.
If you make a loss you can offset it against:
future profits by carrying it forward to a later year
profits from other properties (if you have them)
You can only offset losses against future profits in the same business.
Register for Self Assessment
If you personally rent out property, then you are likely to be liable for tax on the profits:
the first £1,000 of your income from property rental is tax-free
if your income from property rental is between £1,000 and £2,500 a year you should contact HMRC
you are liable to file a self assessment tax return if your income from property rental is: more than £2,500 after allowable expenses, or £10,000 or more before allowable expenses
You need to register with HMRC for self-assessment by 5 October in the tax year after you started receiving rental income. The on-line tax return is due by 31st January: i.e. tax return for 2020/21 tax year is due by 31/01/22, along with payment of any tax.
Landlords with annual business or property income above £10,000 will need to follow the rules for Making Tax Digital (MTD) for Income Tax from their next accounting period, starting on or after 6 April 2023.
You must pay Stamp Duty Land Tax (SDLT) if you buy a property or land over a certain price. When you're buying a property you don't intend to live in for most or all of the time - e.g. a buy-to-let property or holiday/second home - you'll have to pay 3% extra in stamp duty.
An extension to the stamp duty holiday means that until 30th September 2021, you will only pay 3% on up to £250k
stamp duty payments take place at the end of the purchase, and you have 14 days to file a SDLT return & pay the amount due
Capital Gains Tax
When you sell property that’s not your home, you may have to pay Capital Gains Tax (CGT) if you make a profit (‘gain’)
profit is the market value of your property, minus any estate agents’ fees, solicitors’ fees & the costs of major improvement works (building an extension would be included in the calculation; redecorating would not). HMRC provides a tax calculator for working out how much capital gains tax you have to pay, if any
The current CGT tax-free allowance is £12,300, with the rates of capital gains for residential property:
18% for a basic rate taxpayer
28% for a higher or additional rate taxpayer
Anyone who makes a taxable capital gain from a UK residential property will have to pay the tax owed on-line within 30 days of the date of completion by submitting a ‘Residential Property Return’.