Tax on Rental Income: How to Report your Taxable Profits

24/10/2020 - 8 minutes read

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You must pay tax on rental income from renting out your property. How much you pay depends on:

– how much profit you make
– your personal circumstances

Your profit is the amount left once you’ve added together your rental income and taken away the expenses or allowances you can claim.

If you rent out more than one property, the profits and losses from those properties are added together to arrive at one figure of profit or loss for your property business.

However, profits and losses from overseas properties must be kept separate from properties in the UK.

There are different rules if you’re:

– renting a room in your home
– letting a property as a furnished holiday letting
– renting out a foreign property
– letting a property in the UK while you live abroad

Types of Property Ownership

Joint ownership

You can share ownership of a rental property with other people and the amount of rental income on which you will pay tax will depend on your share of the property. Your share of a jointly owned property business is not a separate business from any properties you may own yourself.

Property jointly owned with a spouse or civil partner

Property jointly owned by married couples and civil partners who live together will usually pay rental income tax in equal shares.

If you own the property in unequal shares and are entitled to the income in the same unequal shares, the income can be taxed on that basis. You both need to declare beneficial interests in joint property and income.

Property jointly owned but not with a spouse or civil partner

If you own a property jointly with another person who is not your spouse or civil partner your share of the rental profits or losses will usually be based on the share of the property you own unless you agree a different allocation.

Property Expenses

You can deduct expenses from your rental income when you work out your taxable rental profit as long as they are wholly and exclusively for the purposes of renting out the property.

Find examples of expenses incurred wholly and exclusively for the property rental business.

You can also claim expenses for the interest on a mortgage to buy a residential let property.

Allowable expenses you can deduct if you pay for them yourself

– general maintenance and repairs to the property, but not improvements (such as replacing a laminate kitchen worktop with a granite worktop)
– water rates, council tax, gas and electricity
– insurance, such as landlords’ policies for buildings, contents and public liability
– costs of services, including the wages of gardeners and cleaners
– letting agent fees and management fees
– legal fees for lets of a year or less, or for renewing a lease for less than 50 years
– accountant’s fees
– rents (if you’re sub-letting), ground rents and service charges
– direct costs such as phone calls, stationery and advertising for new tenants
– vehicle running costs (only the proportion used for your rental business) including mileage rate deductions for business motoring costs

Expenses you cannot claim a deduction for

– the full amount of your mortgage payment – only the interest element of your mortgage payment can be offset against your income
– private telephone calls – you can only claim for the cost of calls relating to your property rental business
– clothing – for example, if you bought a suit to wear to a meeting relating to your property rental business, you cannot claim for the cost as wearing the suit is partly for your rental business and partly to keep you warm – no identifiable part is for your property rental business
– personal expenses – you cannot claim for any expense that was not incurred solely for your property rental business

Allowable expenses do not include ‘capital expenditure’, such as buying a property.

Claiming part expenses

Where only part of an expense is for your property rental business, you can deduct that part as long as it’s wholly and exclusively for the property business.

Find an example of claiming part expenses.

Increasing your mortgage

If you increase your mortgage loan on your buy-to-let property you may be able to treat interest on the additional loan as a revenue expense or get relief against income tax as long as the additional loan is wholly and exclusively for the purposes of the letting business.

Interest on any additional borrowing above the capital value of the property when it was brought into your letting business is not tax-deductible.

If the mortgage is for a residential property then the restrictions on interest from April 2017 will apply.

How to Report your Taxable Profits

You must contact HMRC if you have taxable profits from the property you rent.

If you are registered for Self Assessment

You must report your profits on a Self Assessment tax return if HMRC asks you to. HMRC are likely to do this if your income is:

– more than £2,500 after allowable expenses
– £10,000 or more before allowable expenses

Whether you need to fill in a tax return will depend on:

– the total rent you get and the profit you make
– any other income you’ve had or may get, for example, from employment or pensions

If HMRC asks you to send a tax return you must give details of your rental income and expenses for the tax year even if you have no tax to pay.

If you have had property income you’ve not told HMRC about, use the let property campaign.

If you’re not registered for Self Assessment

If you do not usually send a tax return, you need to register for Self Assessment by 5 October following the tax year you had rental income. If you do not, you could be charged a penalty.

There are different ways to register if you’re:

You should allow enough time to complete the registration process so you can send your return by the deadline.

Contact MCL Accountants on 01702 593 029 to optimise your tax position or if you need any assistance with your company accounts or self-assessment tax returns including landlord tax returns.