Landlords Paying Tax On Rental Income

It was Benjamin Franklin that famously said,

in this world nothing can be said to be certain, except death and taxes.

Never a truer word been spoken. For those blissfully unaware, landlords are required to pay tax on rental income. Anything landlords earn from letting property should taxed as regular income tax.

Letting residential property is considered a “business” (even if only one property is being let, and just like most businesses, there are plenty of ways to offset expenses to reduce the amount of payable tax.

Calculating your net profit

Whether you let one or multiple properties, you’re taxed on the overall net profit. You work this out by:

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, 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 up to the value of the rented property when first let.

Reducing your taxable income

As mentioned, you can offset all your business expenses, to reduce the overall net profile, consequently paying less tax. For this reason, it’s best to save all 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.

You can total all your expenses for all your properties, to reduce your taxable income. If you let multiple properties, it is still 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.

For more information, I would recommend checking out the Direct Gov website.

4 Comments - join the conversation...

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Caroline2010-06-07 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?!

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Bill2011-01-19 21:49:02

Can I just also mention that in relation to the above ("well written" ) article

(a) a deduction for wear and tear of 10% of the rents can be made for each year as an alternative to replacement costs of fixtures and fittings etc.

(b) costs of accountancy in relation to somebody preparing your account can also be deducted

(c) it is possible to claim interest on loans taken out for purposes other than the purchase of the property if the situation is managed properly - albeit within the limits of the interest deduction quoted in the article

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Randy2012-08-16 18:58:34

Under your calculating net profit section you did not mention how property taxes are handled. Are those an additional expense?

Thank you

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Victoe2012-09-25 21:53:02

PIM 2205 stating if the lease is for more than 1 year, then the letting agent fees is capital in nature therefore non alowable expenses. Anyone can comments/clarify/ confirm this please?

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