Understanding Tax as a Landlord

Buying a rental property is often regarded as one of the safest ways to invest in the UK. It’s also one of the least intimidating — if you’re unfamiliar with stocks and bonds, physical bricks and mortar is a good option.

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However, you will likely have to pay tax on your rental income profit – the amount left after expenses and allowances are deducted.

If you’re unsure about how tax works in regards to your rental property, you’ve come to the right place. We’ve put together a short guide on the tax you will have to pay, with a few tips on how to reduce tax on your rental income.

What tax do landlords need to pay?

In the UK, you will be required to pay income tax if you earn over £12,500 per year. If you’re employed full or part-time and earning rental income from rental investment, you will be taxed for your combined overall earnings. You will only be taxed for your rental income – and only beyond £12,500 per year – if the rental property is your only source of income.

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What expenses can I claim as a landlord?

It’s impossible to avoid paying tax if you earn over the threshold. But as a landlord, you can claim certain expenses and allowances that will reduce the amount registered as a profit and therefore mitigate the tax you’ll have to pay. As of 2020, landlords are entitled to claim expenses in the following areas:

Mortgage payments

If you have an interest-only buy-to-let mortgage, like most UK landlords, then you only pay interest on the amount borrowed. This keeps mortgage payments to a minimum and increases your rental income each month.

To reduce the tax you pay on your rental property you can claim a basic rate of 20% on your mortgage interest. For example, if you pay £5,000 per year of mortgage interest, you can claim £1,000 against your profits and your income tax will decrease accordingly.

Utilities during a tenancy

Landlords can also claim any services charged as part of the rent. These could include council tax, water rates, any cleaning or gardening costs and utilities such as gas and electricity. If these aren’t included in the rent – ie. you leave it up to the tenant to pay bills – then you can only claim for any bills you covered when the property was empty.

Services paid for

You can claim any services you paid for as part of the letting process, including letting agent fees, property management fees, legal fees, service charges, ground rent and costs incurred while finding a tenant, such as professional home photography or advertising. You’ll also be able to claim against any fees paid to a letting agent, whether online or on the high street.

Furnishings 

If you need to replace any domestic items due to wear and tear, including beds, sofas, carpets and appliances, you can claim for these too. However, any replacements must be the same cost as the original item, and you can’t make a claim if you’re furnishing the property for the first time.

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Property maintenance 

Any potential issues that may arise in your rental property which aren’t the fault of the tenant – for example, a broken boiler or washing machine – fall under your responsibility. However, you can claim replacement and labour costs.

If you’ve hired someone else to manage the property, you claim the hiring cost, but if you manage it yourself you can even put a claim in your annual return for your own ‘management fee’.

Do I need an accountant as a landlord?

You can calculate your own tax returns but using an accountant on a yearly or monthly basis will make the process easier and provide peace of mind, whether you want basic calculation or professional advice on what you can and can’t claim against your earnings. The service doesn’t need to break the bank — you can also claim any accountant fees against your final tax bill.

What you can and can’t be taxed for may seem confusing to begin with, but following this guide is a good first step if you want to save a significant amount of money on your rental income tax.

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