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A Brilliant Deduction

Understanding landlord taxes

Updated: September 17, 2022

Quick Version

Overview

As a landlord you are required to pay tax on profits from your rental income. But there are many considerations when it comes time to self-assess your tax burden. This article explores how taxes for landlords work in the United Kingdom, what kinds of allowances you can make, and ways you can get help in preparing your taxes.

Earning money through your rental property is a great thing. What might not be so great is owing taxes on your profits, as any money you earn as a landlord after deducting allowable expenses is considered taxable income. However, there are certain expenses that can help you reduce your tax burden. Read on to learn all about taxes and how best to reduce what you owe.

Most people in the United Kingdom who earn an income through an employer do not have to file a tax return; the government handles the majority of the work. Landlords, however, are categorised as sole traders and will have to file a self-assessment for the income they make on their property. Further, if your earnings exceed a certain amount (usually when you own multiple properties), you may also have to pay national insurance.

How much tax you pay depends on the profit you make from your properties and any subsequent income from other sources, which determines the taxation bands you fall into. For example, in the 2022-2023 taxable year, your taxable earnings from £12,571 to £50,270 are taxed at 20 percent while those from £ £50,271 to £150,000 are taxed at 40 percent. But this can all change based on your allowances and where you live. Be sure to check the government’s guidance for the latest tax information.

Get the Detail

Allowable expenses

If you were to tally up your rent collected for the year and pay a flat percentage of that, you’d be missing out on some of the tax benefits of being a landlord. There are many allowable expenses that are the result of performing your duties as a landlord that enable you to reduce your taxable income.

But first, a note on mortgage relief: Starting in April 2017, the government began to phase out your ability to deduct mortgage expenses to reduce your tax burden on rental income. The system that replaced this now gives you a tax credit equal to 20 percent of your interest payments on your mortgage. See the embedded video below for a more detailed description of how this works.

<embed https://www.youtube.com/watch?v=EXZK9jSSEI4>

But there are still many other expenses landlords can claim in order to reduce their taxable income. The government defines these as expenses that are exclusively made for the purposes of renting out your property. Allowable expenses include the following.

Maintenance and repairs. You can deduct the costs you pay that keep your tenants safe and comfortable. Notably, non-essential improvements and redecoration are not included, such as remodelling kitchen countertops or upgrading light fixtures.

Utilities and other bills. If you pay utilities on the property, you can deduct these expenses. Typically the tenant pays most utilities but there are situations where landlords opt to do this themselves.

Landlord insurance. If you purchase landlord insurance for the building, its contents, and/or public liability insurance, this can be deducted from your taxable income.

Maintenance services. For example, hiring gardeners, cleaners, or repairpeople, as long as they are acting in service of making the property liveable.

Letting agents and accountant fees. If you use the services of a letting agent and/or an accountant in managing the property, these costs can be deducted.

Advertising costs. When seeking out new tenants there are costs involved in advertising the property, which can usually be deducted.

Miscellaneous costs. Costs that are essential in operating your property business can be deducted. This might involve stationery, phone bills, and vehicle costs.

The government prohibits you from deducting items such as mortgage payments (see above for more information), private telephone calls, clothing, and any other personal expenses.

Getting help

The particulars of tax law and the specifics about what costs are allowed to be deducted can be overwhelming. Should you wish to file taxes on your own, the government does have some resources available to file your self-assessment return, such as videos and webinars, toolkits to help determine your tax burden, and the HMRC community forums where you can ask questions and see responses from like-minded people.

There are also a number of online services that can help you file your taxes correctly. These have the advantage of ensuring a proper self-assessment and maximising your allowances at a lower cost compared to an accountant. The Sharehouse trust partnership network can help connect you to the right service that will help you minimise your tax burden.

Finally, hiring the services of a professional accountant will guarantee someone is working in your best interest. A qualified accountant will be aware of the latest nuances of tax law and will become an advocate for you in reducing your tax burden and maximising your income. The downside is the higher cost in accountant fees, but if you manage multiple properties or your sources of income are complicated, hiring an accountant is essential.

There is no way around paying taxes as a landlord. But understanding the nature of your tax burden and the ways you can reduce it will get you a few steps closer to realising your ideal tax situation. Stick with Sharehouse for the latest tips and current best practices.

Still Got Questions

FAQs

What about council tax?

Your tenant usually will be the one paying the council tax. However, if the property becomes unoccupied, then you might become liable for paying this tax (fortunately this is an acceptable allowance). Other situations where council tax becomes your responsibility include when occupants are all under 18 years of age; when your rental property is a care home or hospital; when your tenants are asylum seekers; and when the property is a house of multiple occupancy (HMO) and tenants pay rent individually. Be sure you are up on the latest government guidance when it comes to council tax.

What are the penalties for not paying proper tax?

It is highly recommended to pay your tax bill on time. You may be responsible for a £100 penalty if you pay your tax bill up to three months late, but higher penalties can arise if this period increases. Further, errors that underestimate your tax liability can also trigger penalties by HMRC, unless you have a reasonable excuse or have taken a reasonable amount of care in preparing your taxes. Accountants and online services can help you make fewer mistakes and prevent these penalties, so be sure to explore all your options.

What if I sell my rental property?

If you sell your rental property you will be responsible for a capital gains tax on the increase in value the property experienced when you owned it. For example, if ten years ago you purchased the property for £100,000 and it now has sold for £150,000 then you would owe capital gains tax on the £50,000 increase—less allowances. Read the government’s guidance on capital gains for further information.

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