Rental Income Taxes: Top Tips

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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.

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.