How much tax does a landlord pay?
The amount of tax a UK landlord pays is subject to their total taxable income.
If a landlord pays the basic tax rate, this is 20% (taxable earnings up to £50,270), while in a higher rate taxpayer, the landlord will pay 40% (taxable earnings from £50,271 to £150,000). The additional rate bracket will mean a landlord pays 45% tax Taxable earnings above £150,000).
There are three main types of tax in the UK: income tax, 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 made from renting property to tenants.
A full-time landlord needs to declare this to HMRC if starting a property business, and then taxation rules are different in a company-based structure.
Watch our YouTube presentation to find out how much UK income tax buy to let property investors pay to HMRC.
HMRC has provided clear information on how to work out your rental income when you let property as a UK landlord.
The frequently asked questions about landlord tax
As property accountants, we are regularly asked about landlord tax. We will look to answer the below questions in this Article.
“Are you paying too much property tax?”
“Should I speak to a property tax accountant?”
“What are the basics of landlord tax?”
“How much tax do I pay on rental income?”
“What are allowable expenses for landlords?”
“When should I report rental property income?”
“How do I complete a landlord tax return?”
“Will I pay less tax by using HMRC’s Let Property Campaign?”
“How does this affect Hong Kongers that are looking to move or invest in the United Kingdom from Hong Kong?”
“How does this affect American readers that are looking to move or invest in the United Kingdom from the United States?”
“How does this affect our British readers that are looking to move or invest in either the United States or Hong Kong?”
Are you paying too much property tax?
Our property tax specialists help over 1,000 monthly retained UK landlords and property investors to minimise tax whilst building their wealth.
There are many reasons why some landlords pay far more buy to let property tax than they need to.
This is because:
-They do not know what they do not know.
-They have not spoken to a tax specialist to go through their situation to see what tax reliefs are available to them.
-Their accountants or solicitor are not aware of the many reliefs available to their clients and are not taken advantage of.
-Tax legislation changes but either the person or their accountant/tax specialist have not been made aware.
Why should I speak to a property tax accountant?
We have worked with many landlords and property investors in the UK.
We have numerous international clients who invest in UK property and seek to minimise the tax they pay in the UK and their own countries.
We specialise in working with property investors from America and Hong Kong and working with British landlords who are seeking to build property portfolios overseas in those areas.
There are many ways in which a uniformed property investor can pay too much property tax on their buy to let portfolio.
The property tax specialists at Optimise Accountants have a large and well-established client base of property investors worldwide whom we help to save UK property tax.
Furthermore, the two Directors are successful property investors with significant and thriving portfolios.
Not only can we advise you on how to pay less tax as a landlord, but we can also help you to maximise your property investments.
Get in touch here to find out why it is vital to speak to a property tax accountant.
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What are the basics of landlord tax?
As property 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 property investor clients.
Ensuring that their property portfolios are as tax-efficient as possible is our main objective as specialist property tax accountants serving clients across the UK and abroad.
Whoever benefits from owning a property pays the tax.
Finding that person means following the income and dividing it between the owners (or those paid from it), such as property lettings managers.
If you are a landlord letting out a property and allowing a third party to keep the income in return for managing the property, you may still need to declare this on a self-assessment tax return even though you were not receiving any rental income.
HMRC wants to see where the income ends up, even with a third party acting as a landlord’s agent.
Property owners, landlords and property investors who pay higher or additional rate income tax can hide their income and reduce their tax bills by claiming that someone else (usually a basic rate taxpayer) is the person gaining the income.
There are legal ways to do this, such as transferring allowances within a marriage or civil partnership or forming a business partnership.
Misrepresenting your tax situation by hiding where income goes is not one of those options.
Many of our landlord clients have several properties.
In these situations, tax liabilities are much the same as when running any other type of business.
For self-assessment, all rents and expenses from similar properties are joined together 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 property.
To discuss how you can reduce landlord tax, speak to us today.
Have a question about property investments, tax or being an expat?
There are a number of free events that will help you build investments/businesses with more comfort and move forwards with confidence.
How much tax do I pay on rental income?
When renting a property to a tenant, you pay tax on any profit made 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 which tax band they fall into.
You can calculate your profits by adding together rental income and deducting any allowable expenses from this total.
HMRC classes rental income as money made from sources including:
– Rent money paid by tenants
– Utility 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 services or laundry services.
These would be claimed as trading income, not rental income.
You can put rental receipts and expenses together when calculating rental profit, so one property’s expenses can be claimed against another’s income.
The income tax rates for the 2021-22 tax year are:
– Higher rate tax band (taxable income from £50,271 to £150,000) = 40%
– Additional rate taxpayer (taxable income over £150,000) = 45%
So if you earn £15,000 from renting out a property, the first £12,570 is tax-free.
You would then pay 20% tax on the remaining £2,430, giving you a tax bill of £486.
To discuss how you can minimise your property tax bill, speak to one of our accountants today.
What are allowable expenses for landlords?
UK Landlords should claim property expenses to minimise their tax liability. Every pound spent on a property reduces the profit, reducing a landlord’s income, which reduces the tax liability.
If you are a self-employed landlord, you’re entitled to a £1,000 tax-free property allowance and another £1,000 tax-free trading allowance.
It is important to note that you cannot claim any business expenses if you claim the £1,000 tax-free trading allowance.
Landlords are entitled to certain tax reliefs.
You can deduct the following allowable expenses from your rental income:
– Insurance (including landlord insurance)
– General property repairs & maintenance
– Water rates, council tax, gas and electricity
– Interest on the mortgage used to buy the property
– Accountant’s fees
– Legal fees for lets less than 12 months old
– Rents, ground rents, and service charges
– Household costs (phone calls, stationery, advertising expenses)
– Vehicle running costs
The following items are not considered to be allowable expenses for landlords:
– Home improvement costs (These are capital in nature)
– The total amount of mortgage payments
– Private phone calls
– Personal expenses
It is vital to retain copies of receipts for any expenses claimed.
HMRC may ask for proof of any expenses for up to six years after you claim them, so scanning or photographing receipts is also recommended.
What landlords are allowed to claim as expenses will vary depending on whether you’re letting residential property, a furnished holiday let, or commercial property.
If you’re unsure what your position is around allowable expenses as a landlord, contact our team of property tax advisors today.
When should I report rental property income?
You need to declare rental income to HMRC before the deadline following the end of the tax year.
The tax year begins on 6th April each year and ends on 5th April the following year, but the deadline for online tax returns is not until 31st January the year after.
If it is your first year completing a self-assessment tax return as a landlord, you need to register by 5th October in the year after you collected rental income.
You must contact HMRC if your income from property rental is less than £2,500 a year.
You must report it on a self-assessment tax return if it is £2,500 to £9,999 after allowable expenses or £10,000 or more before allowable expenses.
How do I complete a landlord tax return?
You need to complete a landlord tax return by 31st January each year through self-assessment.
The self-assessment tax return process is essentially the same whether you are a landlord, small business owner or sole trader.
The first step is to register for self-assessment by 5th October in the tax year following your first rental income.
You will get a Government gateway user ID and password when you register, enabling you to set up a personal tax account and manage your taxes online.
Once registered, you can file your tax return by filling out the self-assessment tax return form online.
The deadline for submitting your landlord tax return each financial year is 31st January for online tax returns.
To fill in your tax return, you’ll need information about all the income you’ve received throughout the tax year, as well as information about all expenses you want to deduct.
HMRC states that landlords need to record the dates a property was let out, all the money a landlord spent, and all rents received.
Landlords also need their UTR (unique taxpayer reference) number when they register for self-assessment.
It is vital to deduct all allowable expenses to work out your total taxable profit.
HMRC states that expenses need to be wholly and exclusively used for the purpose of renting out property.
When you fill in your landlord tax return online, HMRC’s system reacts to information as you enter it and removes sections that aren’t relevant.
UK landlords need to fill in the UK property section to tell HMRC about:
– rental income and other receipts from land or property
– income from letting furnished rooms in your house
– income from furnished holiday lets in the UK or EEA
– premiums from leasing UK land
HMRC will calculate what you owe and send you a tax bill.
HMRC provides helpful information on how to work out your rental income as a UK landlord.
It is essential to speak to a property accountant to minimise your tax bill.
Will I pay less tax by using HMRC's Let Property Campaign?
It is unlikely that less tax will be paid using HMRC’s Let Property Campaign.
There is still a benefit in using the scheme rather than going through an HMRC tax investigation.
It is unusual for the scheme office to request invoices and receipts for expenses. They allow a degree of estimation where specific information cannot be obtained.
It is also possible to reduce potential penalties by approaching HMRC through the scheme before they contact you.
If HMRC has to carry out compliance checks or enquiries to resolve matters, a landlord cannot use the Let Property Campaign.
How does this affect Hong Kongers looking to move or invest in the United Kingdom from Hong Kong?
The Inland Revenue Department (IRD) does not charge Hong Kongers tax on their foreign assets. The income earned from buy to let properties in the United Kingdom will only have to suffer tax at the hands of HMRC and not IRD.
Learn more about our International services to help Hong Kongers move or invest in the United Kingdom
How does this affect American readers looking to move or invest in the United Kingdom from the United States?
Income earned from the United Kingdom buy to let properties will have to be declared to the Inland Revenue Service (IRS) on the 1040 tax return.
Americans that own UK buy to let properties will receive a US tax credit for the tax paid in the United Kingdom.
Americans can elect to have the UK tax as a credit or a deduction on their 1040 tax return.
Learn more about our International services to help Americans move or invest in the United Kingdom
How does this affect our British readers looking to move or invest in either the United States or Hong Kong?
Income earned from the UK buy to let property investments will still be subject to tax by HMRC.
Taxes may need to be paid in the country they are moving to.
Care is required to ensure that you do not pay too much tax to both tax authorities.
You may also be interested to know more about our tax saving services for UK landlords and property developers.