Rental Income TaxesPeople 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.

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.

Rental Income Taxes Example Calculation

Esmie and Liam in London decide to jointly buy a second property, they do not live in it, but rent it out. The London property market has picked significantly so they decide it is a good time to sell.

The property was purchased 5 years ago for £200,000 and had the following additional purchase costs totaling £2,500, these include stamp duty land tax and solicitor’s fees. They have managed to sell the property for £250,000, however, they have sales costs including, solicitor’s fees and estate agent fees of £5,000. The capital gain is calculated as follows:

  • Sales price = £250,000
  • Less Sales costs = £5,000
  • Less Purchase cost = £200,000
  • Less Other Purchase costs = £2,500
  • Capital Gain = £42,500

As Esmie and Liam jointly own the London property they share the gain equally, so they each have a gain of £21,250.

Esmie is a higher rate (40%) tax payer therefore she pays the following capital gains tax (CGT)

  • Esmie’s Capital Gain = £21,250
  • Less CG allowance = £10,600
  • Taxable Gain = £10,650
  • Taxed at 28% = £2,982 tax to pay

Liam has already used his capital gain allowance in the tax year as he has already sold some shares, however, he is a basic rate (20%) tax payer, therefore his gain is calculated as follows:

  • Liam’s Capital Gain = £21,250
  • Less CG allowance = £0
  • Taxable Gain = £21,250
  • Taxed at 18% = £3,825 tax to pay

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.

Lettings Relief

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:

  • £40,000
  • 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.

Rental Income Taxes Top Tips Overview

  • Keep all your property and financial records
  • If you have multiple properties it can be easier to administer if you have a separate bank account for each property
  • Depending on your property strategy consider whether putting your properties into a limited company could be more tax efficient for you
  • Buy properties that are in popular areas for rental, and properties that are attractive to the rental market, get advice from local letting agents if possible
  • Declare all rental income and capital gains
  • If you are disposing of multiple properties consider spreading disposals over different tax years to ensure you fully utilise your capital gains allowances each year

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.

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  • 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.

Further Reading

  • 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.

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