Irrespective of whether you are a professional (buy to let) landlord, in the process of buying properties for the sole purpose of lending them out; or an accidental landlord who rents out their home because they are moving to a different locality or home, it is imperative that you remain aware of your financial responsibilities as a landlord.
Inform your mortgage lender
It is important for you to inform your lender that someone instead of you will be living on the property. Also, depending upon the length of time for the mortgage, you may have to arrange for yourself a different mortgage arrangement.
As a landlord, it is important for you to be fully aware of your Income tax and Capital Gains tax liabilities. Here we list few important points related to your Income tax and Capital Gains tax liabilities.
The income you derive from renting out your property is added to other income that you earn during a financial year and you have to pay Income tax on that. You are required by law to declare this on a Self-Assessment tax return each year. However, you can claim certain exemptions on your rent income to reduce your tax bill. For example, buy to let landlords can claim exemption on the interest that you pay on your mortgage. However, higher and additional rates of tax relief are on their way out and will be phased out by April, 2020 from when a fixed tax of 20% for all landlords will be levied. This means that your tax bills are likely to go northwards, especially if you’re a higher or additional rate tax payer.
Capital Gains tax
If you are selling a property that is not your main home, including rental property, you have to pay Capital Gains tax on the profit that you earn. You can claim certain exemptions in case of capital expenditure on your capital gains tax when the property is sold. It is important to keep records of all the capital expenditure and seek advice from a financial adviser or accountant about tax liabilities and exemptions.
You have to register the tenant’s deposit with a Tenancy Deposit Bank
The primary purpose of this rule is to protect the tenant’s deposits. In England and Wales, the law stipulates you to put the deposits in a suitable scheme within thirty days of signing the rent agreement.
Running a property business
You are obliged to pay Class 2 National Insurance if your profits are over £5,965 a year and if the following conditions apply in your case:
Your primary business is being a landlord
There is more than one property you have put on rent
You buy new properties for the express purpose of renting them
In case of your profit remaining below £5,965, you can make voluntary Class 2 National Insurance payments, to make yourself available for full State Pension.
You are not required to pay National Insurance if you are not running a business despite advertising for tenants, drawing up tenant agreements, etc.
Property you personally own
You are not obliged to pay any tax on the first £1,000 of your income from property rental. This is your ‘property allowance’. You have to fill a Self-Assessment tax return if your income lies between £2,500 to £9,999 after allowable expenses and £10,000 or more before allowable expenses.
Declaring unpaid tax
You can declare unpaid tax by informing HMRC about the income you have received as rent from the previous years. The penalty you will be asked to pay will be substantially lower than what you have to pay if HMRC finds about the unpaid tax on its own. HMRC will provide you with a disclosure reference number and three months’ time during which you have to figure out the amount in unpaid taxes and pay it.
Tax rules for different types of properties vary. There are different tax rules for:
- Residential properties
- Furnished holiday lettings
- Commercial properties
You or your company must pay tax on the profit accruing from property renting. The total amount will be calculated after deductions for ‘allowable expenses’. In case you are unaware of what constitutes’ allowable allowances, it is something you spend money on the day-to-day running of the property. Some examples of allowable allowances are:
Maintenance and repair work on the property. This excludes any enhancement.
Utility bills, like gas, water and electricity
Interest on property loans
Money you pay for services like cleaning or gardening
Sundry expenses like advertising, phone calls, stationery, etc that you bear in order to rent your property
Buildings and contents insurance
** Please note that ‘Capital Expenditure’—the money you spend on renovating your property beyond wear and tear or buying a new property—does not qualify for allowable expenses.
You can claim tax reduction on money spent on replacing a ‘domestic item’ like bed, crockery, sofas, curtains, beds, etc. This is called ‘replacement of domestic items relief’.
Furnished holiday lettings
The tax rules for holiday settings are different from that of private lending.
For furnished holiday homes, you may be able to claim:
However, you have to fulfil the below mentioned criteria in order to claim the tax relief.
- The property is open for rent for at least 210 days in a year
- The property is rented for more than 105 days a year
- No single let exceeds 31 days
- The amount you charge for your property should be in tune with the rent charged for similar properties in the area.
You can claim plant and machinery capital allowances on some items if you have put on rent commercial property such as garage, shop, etc.