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Income Tax on Rental Properties

If you receive rental income from land or property, you will most likely have to pay tax on the profits made. Your profit is the amount left once you have added together your rental income from all sources in the tax year and deducted any allowable expenses or allowances. Tax relief on mortgage interest has changed significantly in recent years, the relief is moving from a deduction from profit to a general tax relief. The overall result should be the same for basic rate taxpayers, however, higher and additional rate taxpayers will see their tax increase. 

Rental income is the rent you receive from individuals, businesses, local authorities, national agency etc. It can also include lease premiums and the income element of leases granted, and this must be considered when granting a lease to anyone.

When preparing your return, income and expenditure from similar types of property are combined, the typical types are, residential, commercial, UK holiday let and overseas property. When calculating the tax, different tax laws may have to be followed.

A £1,000 allowance exists which means that if your rental income totals less than £1,000 per tax year you are now exempt from completing a Tax Return.  If you’re total rental income from UK property is less than £10,000 and your rental profit is less than £2,500 then you do not have to complete a tax return, however, you must notify HMRC of the profit figure every year so that the tax due can be calculated and collected through your PAYE code. Anything over this means you have to complete a tax return for as long as you own the property. 

The same tax rates apply; 0%, 20%, 40% or 45% dependent upon which band you fall into. Whether you have two business and a rental property, just one rental property or are thinking of buying your first property to rent the important element is to ensure you are compliant with HMRC, this is so that you avoid any unnecessarily penalties.

Having an accountant support you with your rental affairs is beneficial as they can advise on elements like carrying losses forward and if you come to sell the property, Capital Gains Tax. Watch out for our blog on Capital Gains Tax coming soon.