Tax on rental income is always a hot topic, so we’ve asked our partners, K&B Accountancy Group, to give an insight into the obligations and taxes that might affect landlords.
Tax on rental income
You need to pay tax on your rental income if you rent out a property in the UK.
Rental income can include money that is received on things including (but not limited to) letting furnished or unfurnished land, grant of certain leases and enterprise investment schemes.
Tax is charged on net rental income, which is the gross rent received minus any allowable expenses.
Allowable expenses include those that are incurred wholly and exclusively for the purposes of the rental business and that are not of a capital nature. Some examples of allowable expenses are:
- Management fee from agency
- Service charge
- Rate and utilities (during the period that the property is vacant but available to be let)
- Building and landlord insurance
- Legal and accountancy fees
- Mortgage interest
- Repairs and maintenance
It is worth noting that from April 2016, the 10% wear and tear allowance was abolished for furnished lettings. Only actual replacements which have been incurred can be claimed.
Expenses of capital nature are those that provide an improvement to the property such as alterations or fixtures and fittings. These type of expenditure will not be tax deductible for income tax purposes but will be able to increase the base cost of your property for capital gain purposes upon sales.
How to declare tax on rental income
Landlords who receive rental income will need to declare it on their self-assessment tax return for each tax year, which runs from 6th April to 5th April. The filing deadlines are by 31st October and 31st January after the end of the tax year for paper returns and online submissions respectively.
K&B Accountancy Group lodges their clients’ tax returns electronically for efficiency and as part of their digital accountancy service.
Tax will be payable by 31st January each year. Payments on accounts may be required and these are due by 31st January and 31st July if the overall tax liability is above £1000.
It is important to note that rental income forms part of your personal tax calculations, which could have an impact on the tax liability of your other income source such as dividends.
Always disclose your rental income (and all other streams of income) to your accountant when working on tax and income projection.
If you live abroad for 6 months or more per year, you’re classed as a ‘non-resident landlord’ by HM Revenue and Customs (HMRC) – even if you’re a UK resident for tax purposes.
If you are a non-resident landlord, tax on your rental income can be paid either by:
- Deducted at source by your letting agency or tenant under the Non-Resident Landlord Scheme or;
- Pay tax through Self-Assessment – if approved by HMRC to receive gross income
The Non-Resident Landlord Scheme
The Non-Resident Landlord Scheme requires your letting agent or tenant to deduct tax at the basic rate of income tax from net rental income.
The scheme applies to all non-resident landlords including individuals and companies. It includes those who reside in Southern Ireland, Isle of Man, Jersey, Guernsey, and Gibraltar.
Your lettings agent will need to deduct tax until they receive the approval letter from HMRC. Deducted tax will be sent to HMRC on a quarterly basis.
How to acquire approval to receive rental income gross as a landlord
You can apply for approval to receive rental income in gross if:
- Your UK tax affairs are up to date
- You have never had any UK tax obligations
- You do not expect to be liable to UK tax
- You are a Sovereign Immune who is not liable to pay UK tax
Once HMRC has approved the application, you will then receive a confirmation letter. Your lettings agent will also receive a letter which has the approval number in order to pay rent gross of tax. Income tax from your rental income will be assessed via self-assessment as mentioned above.
These applications can take up to 6-8 weeks.
For further information on K&B Accountancy Group and their services, please visit their website.