People have rental properties for many different reasons:
- Often it is an investment choice.
- Some have moved and couldn’t sell their original property so decide to rent rather than reduce their resale price.
- Or for others, they can’t afford to live in their house any more so move out permanently / temporarily until their financial situation improves.
Below is a reference guide to how rental income taxes work in the UK with step by step examples. We have some top tips on reducing tax on rental income. Plus national statistics for typical rental costs per region and type of property which you may find useful.
Table Of Contents
- Income Tax On Rental Income
- What rental expenses can be claimed?
- Capital Gains Taxes on Rental Properties
- Tax Reliefs On Rental Properties
- Rental Income Taxes Top Tips Overview
- Private Rental Market Summary Statistics – England, 2014-15
- Further Reading
Income Tax On Rental Income
If you decide to rent a property it is imperative that you declare this rental income to HMRC via your personal tax return whether you make a profit or not.
If your rental property is currently in a loss situation, e.g. your rental income is less than the interest element of your mortgage then it is still important to declare and record the loss, as these losses can be offset against future rental profits for the property.
What rental expenses can be claimed?
The following are legitimate expenses that can be offset against your rental income profit:
- Mortgage interest (not the capital element)
- Letting agent fees
- Repairs and maintenance of the property, e.g. gas checks, decorating
- Building and contents insurance
- Services, such as cleaning or gardening
- Council tax and utilities
- Accountancy fees
- Rent, ground rent and services charges
- Other direct costs of letting the property such as mileage to check on the property, advertising etc.
Capital Gains Taxes on Rental Properties
Many property owners worry about capital gains tax, here is a brief overview of how it is calculated and some common reliefs that may be applicable. In general purchase and sales costs can be offset and capital improvements.
Tax Reliefs On Rental Properties
The following reliefs may apply when selling your rental property, ensure that you research thoroughly or ask a tax advisor or accountant for advice if you aren’t sure to ensure that you don’t miss out on any valuable tax reliefs.
Principal Private Property Relief
If you live in the property at any point and elect the property as your main residence you will benefit from principal private property relief. However, make sure you keep good records to prove your residence, and note that this relief will not necessarily eliminate all the gain if rented for a long period of time.
If you decide to let out your home than you may be entitled to letting relief, this relief can be very valuable it is the lower of:
- The amount of Private Property Residence Relief due
- The amount of gain on the you have made on the let part of your property
Calculating these reliefs can be quite tricky, and if done properly can often eliminate all if not a substantial part of a gain, therefore I would recommend always getting expert advice on large transactions.
Private Rental Market Summary Statistics – England, 2014-15
These statistics summarise rents paid for private properties in England. This is based on data collected by the Valuation Office Agency to support Local Housing Allowance. The statistics are broken down by a number of bedroom/room categories for each local authority in England, for the 12 months to the end of March 2015. The data used to generate these statistics are based on a sample of rental information, collected by Rent Officers from landlords and letting agents.
- Median – when a series of numbers are arranged by order of magnitude the median represents the middle value. Where there is an even number of values the median is the mean of the two values closest to value in the centre of that distribution.
- Region – a geographical unit formerly referred to as Government Office Region (GOR). The GOR framework was the primary classification for regional statistics and comprised nine regions of England, which combined with the devolved administrations collectively, spanned the United Kingdom. From 1 April 2011 the term GOR was dropped in favour of region.
- Check out our Case Study for more tax and accounting strategies for Estate Agents.
- If you are looking for rental income tax help-sheets you can check out the government guidelines for more information.