Owning rental property in the UK comes with its share of tax responsibilities, whether you’re a seasoned investor or a first-time landlord. Understanding your tax obligations and finding ways to maximize your savings is crucial to staying compliant and minimizing tax liabilities. In this guide, we’ll cover essential tax advice for landlords, offering tips on how to be tax-efficient and ensuring you’re meeting all your tax responsibilities.
Know Your Tax Obligations
As a landlord, you’re likely to encounter several taxes during your property ownership journey, including:
- Stamp Duty: This applies when you buy property. Rates and thresholds can vary depending on where you purchase (e.g., England, Scotland, or Wales) and whether you’re a first-time buyer.
- Income Tax: If your rental income exceeds the personal allowance, you’ll need to pay income tax. Be aware that tax bands differ in Scotland.
- National Insurance: If you run a property business, you’ll be liable for Class 2 National Insurance contributions.
- Capital Gains Tax (CGT): This is applicable when selling a property that has increased in value. CGT is calculated based on the difference between the property’s purchase price and its selling price.
It’s important to understand when and how these taxes apply. For instance, CGT only kicks in when the profits from selling your property exceed the annual exempt amount.
Maximise Your Property Allowance
Landlords can claim a £1,000 property allowance on rental income, which means you can reduce your taxable income by this amount. However, you can’t claim this allowance if you’re also claiming tax-deductible business expenses for the same property. If your expenses are lower, the property allowance might be a more straightforward option to save on tax.
However, the property allowance doesn’t apply to rental income from partnerships or rent-a-room schemes, so make sure you understand where it applies to your situation.
Tax Tips for Married or Civil Partners
Married couples and civil partners can benefit from several tax-saving strategies:
- Marriage Allowance: If one partner earns below the personal allowance threshold (£12,570), they can transfer £1,260 of their allowance to the other partner. This can reduce the higher earner’s tax bill by up to £252.
- Adjusting Property Shares: Couples can adjust the ownership split of a property to ensure the lower earner owns a larger share. This can help reduce the overall tax bill.
- Partnership Setup: For couples both in the basic tax bracket, setting up a partnership to share profits can help avoid moving into a higher tax band.
- Private Limited Company: Owning property through a private limited company allows profits to be taken as a salary and dividends, which can help reduce tax liabilities.
These strategies can be complex, so it’s highly recommended that couples seek advice from a property tax expert to ensure they’re making the most of their options.
Carrying Losses Forward
If you incur a rental loss, where allowable expenses exceed rental income, these losses can be carried forward and offset against future rental profits. However, you should be careful about carrying losses for too long, as they might push you into a higher tax bracket in the future.
Claim Rental Property Expenses
To lower your taxable income, landlords should claim allowable property expenses. These must be “wholly and exclusively” for the purpose of running your rental business. Some common expenses include:
- Property management fees
- Repairs and maintenance costs
- Insurance premiums
- Utility bills (if paid by the landlord)
Make sure to keep detailed records and receipts of all expenses related to the upkeep of your property to ensure you’re not missing out on any deductions.
Join the Rent a Room Scheme
If you’re a resident landlord and earn rental income from letting out a room or part of your home, the Rent a Room Scheme could be beneficial. Under this scheme, you can earn up to £7,500 tax-free. If you share the income with a partner, the threshold is halved. If you exceed this amount, you can still claim the allowance by reporting it through your tax return.
Prepare Tax Returns Correctly
When filing your tax return, accuracy is key. Here are some common mistakes landlords make and how to avoid them:
- Mortgage Interest: Landlords can only claim 20% of mortgage interest as tax relief, regardless of their income tax rate. Be sure to claim the correct amount.
- Capital vs. Revenue Expenses: Capital expenses (such as improvements that increase the property’s value) are not deductible as revenue expenses, so be sure to distinguish between the two.
- Mileage: Keep accurate records of business-related travel, and ensure personal mileage is excluded. You can claim 45p per mile for the first 10,000 miles and 25p per mile thereafter.
- Failing to Declare All Income: Ensure you report all rental income, including from holiday lets or overseas properties, on your tax return.
- Late Returns: Missing the tax return deadline or submitting inaccurate information can lead to penalties. Submit your online return by 31 January to avoid late fees.
If you’re unsure about how to complete your tax return, seek the advice of a tax accountant to avoid costly mistakes.
Use the Let Property Campaign
The Let Property Campaign is an initiative from HMRC to encourage landlords to disclose underreported rental profits. Voluntary disclosure can reduce potential penalties and show goodwill to HMRC, should they discover errors themselves.
Conclusion
Taxation for landlords can be complex, but with the right knowledge and strategies, you can ensure that you’re compliant and tax-efficient. From maximizing allowances to understanding the correct expenses, the key is staying organized and informed. If you’re unsure about your tax obligations, don’t hesitate to consult a tax professional who can guide you through the process and help you make the most of available reliefs.
