Tax On Rental Income

I think this is a really important issue which a lot of landlords don’t know the answer to. In fact, I think a lot of landlords just neglect the issue, but are aware that there are some tax implications. So, the question is, do you have to pay tax on your rental income as a landlord? The answer in short is “hell yeah”

A lot of experienced landlords don’t actually pay tax, and if they do, it isn’t much. Landlords only have to pay tax on the net profit they make, which is normal income tax.

Letting residential property is considered a “business”, even if only one property is being let. Multiple properties is also seen as one business, and not split up per property (which is an extremely good thing).

As mentioned, you’re taxed on the overall net profit, and that is worked out with the following formula:

1. Add together all your rental income (for ALL properties you let)
2. add together all your expenses income e.g. mortgage (on the interest only), home insurance, maintenance (for ALL properties you let)
3. subtract your expenses away from your income

Please note that you can only use the INTEREST paid on a mortgage as an allowable expense, not the actual repayment. Also remember that you can only claim interest against a loan upto the value of the rented property when first let.

For this reason it’s best to save your receipts and account for every single penny spent on your investment(s), even if it’s a small item like a pack of nails to put up picture frames, as you can total them up into your expenses. You can add all your expenses together for all your properties, to reduce your taxable income. As said before, multiple properties is seen as ONE business, so if your expenses for one particular property is significantly less than another property you own, it means that you can offset a loss from one property against the profit from others. Your net profit counts as part of your overall taxable income.

If your taxable income from letting property is £15,000+ in a tax year you must declare it on the full Self Assessment tax return. If it’s under £15,000 you may be able to complete a shorter four-page return. If it’s under £2,500 your Tax Office may be able to collect any tax you owe through PAYE (Pay As You Earn) if you already pay tax this way.

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Talk / 1 Comment left so far

Caroline wrote this on 2010-06-07 19:18:57 I am trying to rent my house out so we can emmigrate. There is a shortfall between the cost of the mortgage and the achievable rent that we will have to cover each month. Does anyone know if we will still have to pay tax on this even if there is less than £0 profit?! 1

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