The tax implications of becoming an accidental landlord

There are some 2.66m private landlords in the UK and many people choose to invest in property to rent, because it can offer excellent returns. However, some become “accidental landlords”, a phenomenon that’s become much more common.

It can happen if you need to move to a new location, perhaps if you land a new job or meet someone from somewhere else, but selling your own property proves tough. Rental income earned can enable you to rent or buy elsewhere.

Frequently, couples move in together, of course, leaving one partner’s property available to rent. Later they might need to move to a larger house after starting a family. Many mature people downsize and renting out a larger house can pay for a smaller place to live, while providing additional spending money. Some people inherit family property that they don’t want to sell or can’t.

Becoming an accidental landlord can generate a nice income, but you need to learn some key tax facts if you want to maximise your returns. The following introduction applies if you’re renting out a flat or house in the UK.

REGISTERING FOR SELF ASSESSMENT

As a private landlord, you must pay Income Tax on your rental property profits, which is the amount that’s left (net) once expenses allowed by (UK tax authority) HMRC have been deducted from the total rental income (gross).

Your tax bill will be determined by the size of your net profit and your personal financial/tax circumstances. You can, of course, rent out more than one property or jointly own a rental property, with a relative, partner or spouse, and you will be taxed according to your share.

If your yearly rental income is more than £2,500 after deducting allowable expenses or £10,000-plus before deductions, you’ll need to report your profits via a Self Assessment tax return (SA100) and pay your subsequent Income Tax bill. But before you can do that, you must register for Self Assessment (if you didn’t submit a Self Assessment tax return the year before). Registering for Self Assessment is free, quick and easy online, but there are different rules if you’ve registered for Self Assessment previously.

If you don’t register before renting out your property, you must do so by 5 October following the tax year (6 April to 5 April) in which you received taxable rental profits, otherwise you risk having to pay a penalty.

WHAT RECORDS MUST LANDLORDS KEEP?

You must keep accurate financial records that detail rent you receive and expenses you pay to manage and maintain the property. Using accounting software is highly recommended, because it will save you time, and make things much easier when completing your Self Assessment tax return (SA 100) at the end of the tax year (if you file online the deadline is 31 January after the end of the tax year on 5 April).

You should retain receipts and invoices, because HMRC can ask for proof of your expenses, and ask to look at your bank statements. Keep a log of mileage you drive “wholly and exclusively” for renting out your property, as these can be claimed as an allowable expense. Records must be kept for six years and you can be fined if your records are inaccurate, incomplete or lost.

WHAT TAX DO LANDLORDS PAY?

The standard Personal Allowance is £12,570 if you earn less than £100,000 a year. You’re allowed to earn £12,570 tax-free (slightly more if you claim Marriage Allowance or Blind Person’s Allowance).

The rates are different in Scotland, but in England and Wales:

WHAT ALLOWABLE EXPENSES CAN YOU CLAIM?

To qualify for allowable expenses, expenses must be “wholly and exclusively” for renting out your property – you cannot claim for personal expenses.

Allowable expenses include:

• property maintenance and repairs (eg replacing roof tiles or a broken boiler)
• redecorating between tenancies
• insurance (eg building, contents and public liability)
• gardening and cleaning services
• agent fees/management fees
• legal fees for lets of a year or less
• accountancy fees
• direct costs (eg phone calls, stationery and advertising for new tenants)
• vehicle costs (only the proportion used for your rental business)
• mortgage interest payments.

You cannot claim for:

• property improvements (replacing a carpet with laminate flooring)
• mortgage capital repayments.

CAN YOU CLAIM PROPERTY ALLOWANCE?

Property allowance is a tax exemption of up to £1,000 a year for people who earn income from land or property. If you jointly own property with others, all are eligible for the £1,000 property allowance against their share of the gross rental income.

You may also be able to claim allowances for replacing residential rental property domestic items such as movable furniture (eg beds, wardrobes), furnishings (eg curtains, linen items, carpet, floor coverings), household appliances (eg TVs, fridges, freezers) and kitchenware (eg crockery, cutlery, etc).

When you’re new to renting out property, it’s advisable to seek tailored advice from a qualified professional expert. It could really help to maximise your returns and minimise any tax-related issues.

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Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.