Paying rental tax doesn’t need to be confusing. Remember, you’re running a property business when you let out a house, so you need to inform HMRC regardless of whether it’s a residential let or holiday let.
If you have recently decided to lease a second home which you personally own, then you will need to report your income from the rental property on a Self-Assessment tax return. Or, if you’re a landlord with multiple properties and your primary job is renting property, you will need to pay national insurance rates for being self-employed. The amount will be determined by the total profits you make from your rental properties in a year.
How to work out profit on a rental property
You should calculate your net profit or loss from each rental property as if it is one business:
- Add all of your rental income together.
- Add all of your allowable expenses together.
- Take away the expenses from the income.
The Residential Landlords Association has a tax calculator which can work this out for you.
What if I’m not making a profit yet?
That’s OK, you have a couple of options to manage this. Firstly, you can offset the loss against future profits by carrying it into the next year. Secondly, you can offset losses against profits from other properties you might let. (Remember to deduct losses from your profit when submitting your Self-Assessment form to HMRC).
How can I reduce the rental tax I pay?
Residential landlords can claim for certain costs, which will reduce the amount of rental tax you pay. This is known as your allowable expenses, and applies to costs for the day-to-day running of the let property, including:
- Marketing costs for sourcing tenants.
- Letting agency fees.
- Accountancy fees.
- Council Tax.
- Landlords insurance for the building and contents if furnished.
- Interest on property loans.
- Maintenance and repairs.
- Cleaning or gardening services.
- Utility bills.
- Rent and service charges.
If you are letting a furnished holiday home then you may be entitled to claim on additional expenses, such as allowances for wear and tear on furniture, fixtures and fittings, loans to traders and so on.
Tax rate changes for landlords
Back in 2015, George Osborne announced that tax breaks for buy-to-let landlords would be curbed to “create a more level playing field between those buying a home to let and those buying a home to live in”. As a result, the amount of tax landlords can claim has been capped at the basic rate of tax since April 2017. Buy-to-let landlords can offset their mortgage interest payments and some of their costs against their income.