Advice for Landlords on tax for rented property

Do I need to pay Income tax on rented property?

All rental income arising from property in the UK is taxable, regardless of the tax status of the Landlord. Income tax is payable on the profit generated by the letting of your property. It is the Landlord’s responsibility to inform Inland Revenue of any income they receive from their rental portfolio using the ‘Self Assessment’ procedure.

It is necessary to prepare accounts each year on income received from rental properties and should be presented to the Inland Revenue indicating the tax liability that might arise. Tax liability is assessed on the tax year running from 5th April every year. You can offset a number of costs (expenses) against your tax liability. Allowable expenses are things you may need to spend money on in the day-to-day running of the property, like:

• letting agents’ fees
• legal fees for lets of a year or less, or for renewing a lease for less than 50 years
• accountants’ fees
• buildings and contents insurance premiums and excesses
• interest on property loans
• maintenance and repairs to the property (but not improvements)
• utility bills, like gas, water and electricity
• rent, ground rent, service charges
• Council Tax (whilst the property is vacant)
• services you pay for, like cleaning or gardening
• other direct costs of letting the property, like phone calls, stationery, travel and advertising

However, in the 2015 Summer Budget, the Chancellor of the Exchequer, George Osborne announced a slight change to the legislation on “allowable expenses”. Landlords can currently deduct 10% of the rent charged for “acceptable wear and tear”, even if no actual improvements have been made. However, from April 2016, landlords will only be able to deduct expenses they actually incur.

Tax for landlords changed in 2015 summer budget

In the Summer 2015 Budget, the Government announced that tax breaks for ‘buy-to-let’ landlords would be curbed in order to “create a more level playing field between those buying a home to let and those buying a home to live in”.

As a result of these changes, the amount of tax landlords can reclaim as ‘relief’ will be capped at the basic rate of tax over the course of a four year period beginning in 2017. This will be the case regardless of whether the landlord is paying the lower or upper or top rate of tax, meaning that the amount of tax relief that landlords in the top 2 tax brackets receive on their mortgage interest payments will be slashed.

As such, relief for finance costs will be restricted to the basic rate of Income Tax as of 6 April 2017. These financing costs include mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans.

Therefore from 2017 Landlords will no longer be able to deduct all of their costs to arrive at their property profits. Instead, they will receive a basic rate reduction from their Income Tax liability. The scheme will be gradually introduced, meaning that:

In 2017-2018, the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs. The remaining 25% is available as basic rate tax reduction. 

In 2018-2019, this will change to 50% finance costs deduction and 50% given as a basic tax reduction. 

In 2019-2020, this will change again to 25% finance costs deduction and 75% given as a basic rate tax deduction. 

From 2020-2021, all financing costs incurred by a landlord will be given as a basic rate tax deduction.

The gradual introduction of the changes over four years from April 2017 should theoretically help landlords adjust to the new regime

Non UK Resident Landlord Resident outside the UK

Where the Landlord resides abroad (outside the UK and is not registered for 'Self -assessment' then tax will be deducted by ourselves and forwarded to HMRC unless the agency has authority from HMRC to pay monies direct to the Landlord without deduction of tax. The Landlord must seek to register for “self assessed” for rental if living abroad and becoming a non-resident Landlord

Do I need to pay Tax if I sell?

You’ll usually have to pay capital gains tax (CGT) when you sell the property you have been letting if it has increased in value. Special rules apply if the property is or has been your home. Otherwise, the property is treated in the same way as the sale of any other asset.

Under current rules, any CGT due on the sale of property is payable by 31 January after the end of the tax year in which the sale occurred. Depending on the date of the sale, this can give you between 9 and 18 months to pay. The government has announced that from 2019 onwards, CGT on property sales will be payable within 30 days.

Capital gains tax rates for 2016-17

The rate at which CGT is charged on residential (second) property sales in 2016-17 remains 18% or 28%, depending on your overall income. It has not been reduced to 10% or 20%, which are the 2016-17 rates for non-property gains.