With little to no intention of developing a buy-to-let portfolio, many accidental landlords often find themselves falling foul of the complex tax rules that surround the sector. The housing market moves at a fast, and sometimes unpredictable pace, and there are many things to consider than just collecting rental income each month.
Whether it’s changing your mortgage; applying for a Consent to Let agreement for 12 months; keeping tabs of your income, which will be taxed and needs to be declared; staying abreast of tax relief changes; arranging the right type of insurance; and understanding your legal obligations – the list is extensive.
So, if you suddenly find yourself in a situation where you are now a certified landlord with paying tenants, what are the key things you must remember, in order to stay in line with HMRC?
Register For Self Assessment
As we mentioned, the income that you make as a private landlord must be declared to HMRC and, in order to do this, you’ll need to register for self-assessment and then submit a tax return each year – for example, if your annual rental income is more than £2,500, after deducting allowable expenses, or £10,000-plus before deductions. By filing a self-assessment tax return, you’ll be able to work out how much income tax you need to pay on your rental property profits – this is the amount that’s left (net) once expenses allowed by HMRC have been deducted from the total rental income (gross).
Your tax bill will then be determined by the size of your net profit and your personal financial/tax circumstances. Don’t panic, however, if you’ve not registered for self-assessment before renting out your property. You have until October 5 following the tax year (April 6 to April 5) in which you received taxable rental profits, otherwise you risk having to pay a penalty.
Keeping on top of the books
When it comes to filing your tax return, it’s imperative that you keep all relevant documentation. These include rent you receive, expenses you pay to manage and maintain the property, any relevant receipts and invoices, even a log of mileage you drive “wholly and exclusively” for renting out your property, as these can be claimed as an allowable expense. This will enable you to provide the most accurate information relating to those earnings. And remember, records must be kept for six years, and you can be fined if your records are inaccurate, incomplete or lost.
The secret to submitting your self-assessment tax return on time and correctly is to be extremely organised, ready for the impending deadline on 31 January, and to be completely clear about what it is HMRC is looking for. Otherwise, the whole process can turn out to be both stressful and slightly overwhelming.
Think about it in six parts: do I need to submit a self-assessment? When do I need to fill it in by? When and how do I register? What sections apply to me? What expenses can I claim on? And, finally – the most important part – how do I pay my final tax bill? Address each one of these carefully and in plenty of time and the online deadline will come and go pain-free.
What tax do landlords pay?
The standard Personal Allowance is £12,570 (2021/22 tax year) 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:
- If you earn between £12,571 and £50,270 a year, you will pay 20% Income Tax (Basic Rate) on your taxable income.
- If you earn between £50,271 and £150,000 a year, you will pay 40% (Higher Rate) on your taxable income.
- If you earn more than £150,000 a year, you will pay 45% Income Tax (Additional Rate) on your taxable income.
Claiming property allowance
As a private landlord, you may be entitled to a number of allowances in regard to your income tax obligations relating to low-level rental income.
Property allowance is a tax exemption of up to £1,000 a year for people who earn income from land or property. As is common in the buy-to-let market, if you jointly own property with others, everyone is eligible for the 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, furnishings, household appliances and kitchenware.
What allowable expenses can you claim?
It’s important to remember that allowable expenses must be “wholly and exclusively” for renting out your property. If you try to claim for personal expenses, then you will get caught out.
Allowable expenses include:
direct costs (e.g. phone calls, stationery and advertising for new tenants)
mortgage interest payments.
property maintenance and repairs (e.g. replacing roof tiles or a broken boiler)
redecorating between tenancies
insurance (e.g. building, contents and public liability)
gardening and cleaning services
agent fees/management fees.
However, it’s important to note that there a couple of things you cannot claim for – namely, property improvements and mortgage capital repayments.
It may not have been in your masterplan to become a property tycoon, with an extensive portfolio, but if you do find yourself renting out property for whatever reason, it’s important to keep up-to-speed with the latest guidance, and understand your obligations, both legal and tax, to help maximise your returns and minimise any potential issues.
*Mike Parkes is Technical Director at GoSimpleTax – the online tax return and self-assessment software.
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