When you are a landlord, there are certain rules which you must follow when it comes to letting out your property to another person. These rules can often be confusing, and difficult for people to understand. To try and help you with this, we’re taking a look at a few of the ground rules surrounding landlord tax for UK based and non resident landlords.
Landlord income tax liability
If you rent out property to someone, then you need to pay income tax on any profits made over your tax free personal allowance. This is because the money you make from the letting of your property counts towards your taxable income, and is thus subject to income taxation.
You’ll need to let HMRC know when you start letting out your property, as a failure to do so can result in substantial penalties. HMRC will normally require you to complete a self assessment tax return so you can declare your rental and any other taxable income.
The taxable income you pay depends on how much you earn, with people who earn within the standard 20% tax rate. This is until such a time when your earnings reach the higher tax bands of 40% or 45%.
If you meet certain criteria, then you will be able to get income tax relief, which will either see you paying less in taxation, or none at all.
UK non resident landlords
In general the same rules apply to UK non resident landlords but there are some differences. For example the non resident landlord scheme (NRLS) exists to allow eligible landlords to receive their rental income without tax being deducted by their rental agent or tenant. In some cases non resident landlords can be owed a tax rebate if they have not joined the non resident landlord scheme.
Your rental expenses
You should consider that the income you earn, and thus what is taxable will depend upon the profits, so you’ll need to take your expenses into consideration.
When it comes to calculating your costs, they are split into two parts. These are the revenue expenses and the capital expenses. The revenue expenses are those who are paid on a day to day basis to ensure that the property stays running. These include things like the fees of any letting agencies, the utility bills and the council tax bills. The capital expenses are such things that would increase the value of the property, such as renovations, and these are not deducted from the income tax bill. Furthermore, if you are letting a furnished property, which is one with possessions inside of it already, you can claim an additional 10% in ‘wear and tear’ expenses’. This allowance can be used to repair and maintain the possessions which you are giving to the tenants as part of the letting but only up to the 2015/2016 tax year.
Overall, dealing with the tax bit of being a landlord can be somewhat difficult to try and understand at first glance, so we hope this guide has helped to clear some of the finer points up.
The money you make from letting a property is part of your income and not a separate set of money, so you’ll be increasing the amount of tax you pay if you cross a certain threshold. As well as this, it is important that you consider some expenses you’ll need to pay regarding keeping the property running, and also anything you’ll need to be able to afford regarding renovations. These all affect the amount in profits you take home from your letting income, which in turn will affect how much your income rises by, so it is critical that you keep it in mind.
