Property investment has always been a reputation as a safe option for people who want a regular income from renting their property. Despite this, rental income does have some tax implications.
During tax season, the UK has three kinds of taxes: income tax, national insurance, and VAT. Unless you work full time and are also employed, if you rent out your properties to tenants, you won’t have to pay any tax on your profits. If you rent out your property, you’ll have to pay taxes on the income.
When it comes to calculating your property income tax at the end of the year requires some work. When an unoccupied property is in your possession, you are responsible for paying council tax, but the tenant is responsible.
Full-time landlords must declare to HMRC that they are starting a business, and their taxes will differ in that case. For rent-to-rent landlords, this article covers accountancy and tax.
Key Takeaways
- Buying property in the UK requires in-depth consideration of the taxes and being up to date on whether it will be liable.
- Landlords or property owners in investments must carefully consider the taxes and pay the requirements.
- Every landlord must pay the rent tax to rent a property.
Tax to pay on rental income
During the 2021-2022 tax year, your allowance of £12,570 applied to any profits from renting a property to a tenant that exceeded that allowance. The allowance applies to tax years up to and including 2025-26. According to your tax band, you will pay different amounts of tax.
The best way to estimate your profits is to add together your rental income and subtract any allowable expenses from this number.
A rental income can come from a variety of sources, including:
- Tenant’s rent
- Costs associated with utilities (e.g., gas, electricity, water)
- Communal space cleaning fees
- Fees for parking
Furniture usage fees
No money is included here that comes from any services commonly provided by landlords, such as common meals, cleaning, laundry, and other services they cannot normally provide. In this case, you should claim the rental income as a separate item instead of as trading income.
What taxes do landlords have to pay in the UK?
Generally, landlords are required to pay five different types of taxes on their properties:
Stamp Duty
A landlord’s first tax to deal with is usually stamp duty. Any property you purchase in the UK must be subject to this tax.
Rental Income Tax
To figure out your tax band, you need to subtract your rent (minus expenses) from the other income sources that you receive.
National Insurance
To claim National Insurance on your rental income, you must comply with the following:
HMRC determines that you are running a “property business.”
In the last year, your profits have exceeded £6,725
Capital Gains Tax (CGT)
Capital gains tax applies to properties sold for a profit.
The following are not subject to CGT:
- Less than £12,300 in capital gains
Investment tax relief and allowable expenses for buy-to-let income
Taxes are assessed on landlords on their net rental income, which is the profit left over if all the property allowances and allowable expenses have been deducted from the total rent they receive. Buy-to-let expenses are limited by HMRC’s strict rules on rental income.
Property allowance
Rental income can be tax-free up to $1000 annually, otherwise known as your property allowance. In other words, landlords earning less than £1000 don’t have to calculate and report their expenses to HMRC; their rental income is tax-free. The deduction of expenses can be more useful to landlords earning less than £1000 in some circumstances than landlords earning more than £1000, but this would depend on your circumstances.
A self-assessment tax return is required if your rental income exceeds £1000. You’ll get the property allowance if you don’t deduct your expenses from your rental income.
As a result of taking advantage of the £1000 property allowance, a landlord receives a partial income tax deduction annually. Your rental income goes tax-free if your deductible expenses are under £1000, so partial relief is excellent.
Rental income deductible expenses
Any rental expenses you deduct will not be taxed. But there are some rules about what you can and can’t deduct. For instance, you can deduct expenses for subletting, but it has to be you have to pay for them.
Conclusion
These are comprehensive taxation systems every landlord needs to be aware of. When you count on Pluxa Property companies, you will be in the shadow of getting served by the best company.
With over 10 years in the real estate industry, we aren’t just focused on getting the best deals for our clients; we make sure they understand what taxes they need to pay.
On top of that, we put you through the best buy-to-let deals that will allow you to get the best investment and ensure a consistent passive income.
Visit us, and we will help you with the best investment and ensure to meet all your checklist for investment goals.
FAQs
What tax do you pay on rental income?
Unless your rental income exceeds £12,570, you will not have to pay tax on it. The higher rate threshold for rental income is £50,270, which is above £12,570. Using the basic rate, you will pay 40% of the rental income you generate above £50,270 and below £150,000, the additional rate threshold.
Get the best deals on the rented property with us.
What is the difference between rent and rent expense?
As a part of your operating expenses, your rental expenses are included in your payable rent entry. In contrast, your rent expense is reflected in the money you must send to your landlord to fulfill your lease term.
Peter Juhasz is the founder of Pluxa Property, the biggest property investment company in UK and Group CEO of AIP Capital Group and a property investment expert with over a decade of experience in the UK market.
He built a successful property company using innovative cashflow strategies like Serviced Accommodation and HMOs, scaling to 200 units in four years.
Peter leads a team specializing in property and business acquisitions across various sectors. A former co-host of “Cashflow With Property,” he shares his expertise in real estate investing and business scaling.
He is committed to continuous learning and helping SME owners and investors maximize their returns, driven by his passion for empowering others to achieve their financial goals.
To learn how Pluxa Property can help you in UK property investment, contact our experts.
