A Rackhams Accountants Guide: Tax Matters for Property Investors
The subject of taxation relating to owning and renting out property is huge. There’s a lot private landlords need to know about tax. Not only that, it’s complicated, and different rules apply to different types of property investors.
But it’s not all bad news!
Recently introduced legislation has tightened things up for landlords running their property interests through a company. Private landlords, however, with just one property, are treated by HMRC as individuals with an additional source of income.
We’ll focus on the rules relating to self-employed private landlords.
As a private, self-employed landlord with just one rental property, you can be self-employed and do not have to form a company or formal business.
How much stamp duty is there on buy-to-let property?
If you’re buying a property to let, the first encounter with tax will be paying stamp duty on the purchase just as you would for a residential home. The good news, though, is that stamp duty rates for buy-to-let property are lower than for domestic residential property.
| Portion of property price (England and NI) | Buy-to-let stamp duty rate |
| £0 – £40,000* | 0% |
| £0 – £250,000** | 3% |
| £125,001 – £250,000 | 5% |
| £250,001- £925,000 | 8% |
| £925,001 – £1.5 million | 13% |
| £1.5 million + | 15 % |
More good news!
Landlords are entitled to a £1,000 tax-free property allowance.
If you earn less than £1,000 from letting a property, you don’t need to tell HMRC.
If you’re letting property and receiving up to £2,500 a year in rental income, you’ll have to inform HMRC. Whether through a letting agent or you’re managing the tenancy yourself, you need to register with HMRC as self-employed.
If you earn more than £2,500, you’ll also have to submit a self-assessment tax return to declare your rental income as self-employed earnings (which can run alongside being an employee if you also have a job).
If you’re submitting a self-assessment tax return online for the first time, you’ll need to register on the HMRC website https://www.gov.uk/self-assessment-tax-returns
Set up your *Government Gateway user details for your online tax account (this is not the same as your unique taxpayer reference (UTR) number or your national insurance number).
Self assessment online
New online accounts are easy to set up. Still, you may have to wait up to 10 days to receive an activation code, particularly at busy periods (like now). If you’ve had an account number allocated in the past and have lost track of it or your password, you should not set a new account up but retrieve your existing account by going to https://www.gov.uk/log-in-register-hmrc-online-services/problems-signing-in
*[Rackhams Accountants has a gateway with HMRC. We submit returns directly to HMRC on behalf of our clients, so they don’t need to set up a personal Government Gateway.]
How is my rental income taxed?
Income tax thresholds apply to rental income in just the same way as employment income.
The current annual personal tax allowance is £12,570.
Anything over this figure is subject to basic rate tax of 20% up to the basic rate ceiling of £50,270.
40% tax applies on anything above this figure up to £150,000 when the rate increases to 45%.
If you also earn income from a job or other self-employment, add your income from renting property to determine your total gross income.
Will HMRC find out if I don’t tell them?
At this point, you may be wondering how the HMRC would even know that you’re a landlord and are receiving rental income?
Although the tax authorities may have been inattentive in the past, shall we say, they are waking up to the fact that the UK has more than two-and-a-half million private rental income-earning landlords!
HMRC gathers information from letting agents, Land Registry, council records and the Department for Work and Pensions. Don’t get caught out—a full tax investigation is time-consuming and very stressful, and that’s before they impose any fines!
What about National Insurance?
If you’re running the rental property as a business, you have to pay Class 2 NI.
If you’re a self-employed landlord, you may have to pay Class 2 NI if:
- You earn more than £6,475 a year in rental income
- Being a landlord is your primary job
- You rent out more than one property
- You’re buying properties to let
How much of the rental income I earn is taxable?
The rules are complicated and fiddly to apply. It’s difficult to know how one rule or another relates to your individual circumstances? They also change frequently, and what may be allowable now can change in future.
As we continue to face economic turbulence and Whitehall’s coffers are looking depleted by the pandemic, don’t rule out a ‘snatch and grab’ raid on private rental income! For now, HMRC offers allowable income tax deductions for landlords. As a self-employed person, you should look at HMRC’s guidance on allowable expenses for self-employed.
https://www.gov.uk/expenses-if-youre-self-employed
Can residential landlords claim for day-to-day running expenses for their property?
Yes they can! At the moment, allowances include:
- Bad debt
- Business costs, phone calls, letting agency and other professional fees
- Insurance cover for buildings, contents and rent guarantees
- Interest on loans and credit
- Repairs and replacements for the property
- Services such as cleaning and gardening
- Utility bills and council tax (while the property is unoccupied)
Nothing is as sure as change
And that’s especially true of the regulations surrounding investment property.
As we mentioned earlier, the UK’s army of private landlords are firmly in the Government’s sights, and any aspect could become ‘fair game’.
It’ll pay to stay vigilant and get proper advice to keep on the right side of HMRC. We also advise all our landlord clients to:
- Keep accurate records
- Keep up with legislation affecting landlords, especially at the tax year end/new start and the budgets
- Consult an expert; we’re always happy to answer your questions
Is it really this simple?
We’ve talked about income tax as it applies to a self-employed landlord. There are many more tax implications concerning owning and letting property!
Landlords are required by law to issue every tenant with the following Government publication. ‘How To Rent Guide’ gives helpful advice to tenants and landlords.
Next issue: Setting up a business to own and let property
Rackhams Accountants Call 01482 631700 to book your free, no-obligation business start-up consultation.
The information in this article was correct at the time of publication.
