Property Developers, Property Investors, Doctors / GPs

How much property tax does a landlord pay?

Simon Misiewicz

Simon Misiewicz

Expat & Property Tax Specialist

29th October 2021

How much tax does a landlord pay?

The amount of tax landlords pays is subject to their total income.

If a landlord pays the basic tax rate, this is 20% (earnings up to £50,270), while in a higher rate taxpayer, the landlord will pay 40% (earnings from £50,271 to £150,000). The additional rate bracket will mean a landlord pays 45% tax on earnings above £150,000).

There are three main types of tax in the UK: income, National Insurance and VAT.

Landlords letting out one or two properties while in full-time employment will often only need to pay income tax on the profit from renting a buy to let to tenants.

A full-time landlord must declare this to HMRC if starting a property business. Rules are different in a company-based structure.

Watch our YouTube presentation to determine how much UK income tax buy to let investors pay to HMRC.

HMRC has provided clear information on how to work out your rental income when you run a buy to let business in the UK.

One of the questions we are asked is, “Do I need a property accountant near me” to work this out. I would say no. This is because we use Zoom as a great way to help you get answers.

What are the basics of landlord tax?

As accountants serving thousands of UK landlords that purchase buy to let properties, we know that landlord tax is one of the main concerns for all of our investor clients.

Ensuring that their investment portfolios are as tax-efficient as possible is our main objective as specialist accountants serving clients across the UK and abroad.

Whoever benefits from owning a buy to let investment pays the tax.

Finding that person means following the income and dividing it between the owners (or those paid from it), such as lettings managers.

Suppose you are a landlord letting out a buy to let and allowing a third party to keep the income for managing the property. In that case, you may still need to declare this on a self-assessment even though you were not receiving any rental income.

For self-assessment, all rents and expenses from similar properties are combined into a single figure.

Landlords need to divide properties, rents and expenses in the following way:

– UK rentals – any buy to let or share house rented out on a shorthold tenancy agreement
– Overseas rentals – any properties abroad let on a long lease
– Holiday lets – homes located within the EEA that qualify as furnished holiday lets

We recommend that all landlords review what HMRC expects landlords to do from a tax perspective when renting out their buy to let assets.

Why do people ask for an “accountant near me” when they can use specialist accountants worldwide. There is no need. The power of technology allows questions to be answered by accountants anywhere in the world.

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We have now created free online tac courses to help you build wealth whilst paying less tax. Learn today and save tax tomorrow. We have covered the basics of tax filing with HMRC and IRS. We have created courses on advanced planning strategies that will save you tax in the future.

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Buy to let allowable costs - Revenue or Capital?

Allowable expenses on rental income can be categorised in one of 2 ways to help mitigate payments being made to HMRC. These are:

– Revenue allowable costs (that can be used to reduce your buy to let profits as allowable expenses on rental income).

– Capital costs (that can be used when you sell the buy to let and can be set against the amount of gain made to reduce your capital gains liability).

HMRC’s website states that allowable expenses on rental income refurbishment are permitted provided that the property is in a lettable state. HMRC’s website says, “A buy to let acquired that wasn’t in a fit state for use in the business until the repairs had been carried out or that couldn’t continue to be let without repairs being made shortly after acquisition.”

A landlord may incur expenses for a rental business before that business starts. If so, they may be able to claim deductions on rental income once the letting begins (ITTOIA05/S57 or CTA09/S61). Relief is only due under these special rules where the expenditure:

– is incurred within seven years before the date the rental business is started, and

– is not otherwise allowable as a deduction for tax purposes, and

– it would have been allowed as a deduction if it had been incurred after the rental business started.

Refurbishment costs will be considered capital if you cannot get a buy to let mortgage. This is a good signal to suggest if the buy to let is dilapidated or in a lettable state. Suppose the property is in a  lettable, then HMRC will see like for life repairs/replacement as allowable to be offset against your income. If the property does not have a buy to let mortgage, this tells HMRC that the buy to let is dilapidated and that refurbishment costs are capital.

Allowable expenses on rental income to reduce your profits

Three types of landlord allowable expenses are to be offset against your rental profits. These allowable refurbishment costs will reduce the tax that you pay to HMRC. The three Rs are:

– Replacement (kitchens, bathrooms and furniture)

– Repairs (roof tiles, garden fence, brickwork)

– Renewals (replastering, repainting)

The above expenditures are all allowable expenses on rental income.

Let us take a buy to let that you have purchased. It is a property that has not been renovated for many many years. You know the types of property that have:

– The beautiful woodchip wallpaper

– The stunning salmon bathroom suite

– Furniture that looks as though it was leased from a museum. Yes, people still watch black and white TVs

A note on Stamp Duty allowable expenses on rental income 

Identifying fixtures/fittings and furniture = chattels means you do not pay

£200,000 buy to let value

£10,000 (F/F and F = settee, tables, freestanding kitchen appliances
etc.)£190,000, which is used for SDLT purposes, not the £200,000 thus saving SDLT.

– The kitchen sink that resides in a bedroom wardrobe (yes, this happened to me)

Landlords know that properties would not achieve high rental income if in a poor state.

As such, you would replace the kitchen and bathroom suites and these landlord allowable expenses are permitted if they are like for like replacements (same number of cupboards and functionality). As such, these items would be considered tax deductions on rental income.

Once you have replaced these items, you may focus on the decoration. You can claim 100% of the tax deductions on rental income if you renew the paintwork and plasterwork to make them look shiny and new. The same applies to the replacement curtains, carpets and furniture mentioned before. I am sure you can already see there are many landlord allowable expenses.

There are times when it would appear that improvements have been made to a buy to let. Many accountants would capitalise on these costs as HMRC’s website says, “alterations due to advancements in technology are generally treated as an allowable expense on rental income rather than an improvement if the functionality and character of the asset are broadly the same. For example, when single glazed windows are replaced with double glazing.”

If you replace boilers, plumbing, and wiring, these landlord allowable expenses will reduce your profits.

Free Online Tax Calculators

We continue to develop brand new U.S and UK tax calculators for you to use. We focus on tax calculators such as: Income Tax, Capital Gains Tax, Stamp Duty Land Tax, Inheritance/Estate Tax

Use our online tax calculators today to help you make money-saving decisions tomorrow

Free online tax calculators

How much tax do I pay on rental income? 

When renting to a tenant, you pay tax on any profit from the rental income that goes over the personal allowance of £12,570 for the 2021-22 tax year.

The amount of tax a landlord pays depends on their total earnings.

You can calculate your profits by adding rental income and deducting any allowable expenses from this total.

HMRC classes other landlord allowable expenses as:

– Rent money paid by tenants
– Utility allowable costs
– Fee for cleaning communal spaces
– Parking fees
– Additional fees for the use of furniture

It does not include money from services not usually provided by landlords, such as meals, cleaning, or laundry services.

You can put rental receipts and expenses together when calculating rental profit, so landlord expenses can be claimed against another’s income.

The income tax rates for the 2021-22:

– Higher rate tax band (income from £50,271 to £150,000) = 40%
– Additional rate taxpayer (income over £150,000) = 45%

So if you earn £15,000 from renting out a buy to let, the first £12,570 is tax-free.

You would then pay 20% tax on the remaining £2,430, giving you a bill of £486.

Free Online Tax Courses

Want to save tax in the future?

We have now created free online tac courses to help you build wealth whilst paying less tax. Learn today and save tax tomorrow. We have covered the basics of tax filing with HMRC and IRS. We have created courses on advanced planning strategies that will save you tax in the future.

We have training programmes for UK tax and US tax. Learn today and save tax tomorrow

Free online tax course

Free – Access NOW!!

Let Property Campaign

You may have realised that you have rental income that has not been disclosed to HMRC. Fear not. It is possible for you to report to HMRC that you had rental income in the past. The let property campaign allows taxpayers to submit multiple years of data to HMRC on one form.

HMRC's £7,500 Rent a Room Scheme

It is possible to earn tax-free money from HMRC from your home. Many homeowners rent a room and earn £7,500 tax-free. This is allowed under HMRC’s Rent-a-room allowance.

Deed of trust on property to reduce property tax

It is possible to allocate property income between spouses in order to be tax efficient. This is done using a declaration trust also known as a deed of trust on a property document.

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