New Investors: What You Need to Know About Tax on Rental Property Income

canstockphoto10466726If you’re landlord in the UK or operate a buy-to-let property, you must pay tax on profit you make from renting the property.  The profit is your rental property income, which is the total revenue from all your property in the UK, minus your personal allowance for the year and allowable rental expenses claims.

In addition to your direct earnings from letting out your property, your rental income is calculated to also cover any payment you receive from your tenant for use of furniture and any other home convenience charges like cleaning of communal areas, central heating system, and general property repairs.

If you have several properties in the UK, you must sum all the rental collections and treat them as one when deducting your allowance and expenses claims and calculating your rental income.

The tax you will pay on your rental property income is the same rate as the income you receive from your business or employment. So, depending on the tax band your income is categorized, your rental property income tax could be 20%, 40% or 45%.

The rules vary in some cases, for example when you earn income from a foreign property or operate a commercial holiday home. In such cases, the profits and losses will be calculated differently from other rental properties.

You could be exempted from property tax in the UK if you let out a room or an entire floor in your home at not more than £7,500 per year (or half of the amount, if you co-own the property). But you’ll be appropriately taxed if you earn more than the £7,500 threshold.

What Property Expenses Can You Claim and Deduct Before Tax?

As well as your personal allowance for the year, you are allowed to deduct the costs incurred for renting out the property before paying your tax. Your allowable property expenses includes expenses for general maintenance and repairs, landlord insurance, interest on mortgage, agent and management fee, legal fees and accountant fees.

Your allowable rental expense claims, however, does not include capital expenditure like general improvements on the property, installing a security system or adding an extension.

Additional Costs to Consider

Whether you’re letting out a small flat or a large property, you should look for a tailored landlord insurance policy to protect you against risks and unforeseen costs which could seriously drain you. This is different from residential property insurance as it can cover essential extras, such as the cost of relocating tenants should the property becomes uninhabitable.

The law does not mandate you to buy landlord insurance, but astute property business operators know well to get a comprehensive cover against risks associated with a rented property.

There are different smart landlord insurance policies by reputable insurance companies tailored to your specific needs. A trusted insurance firm can secure for you a property owner’s liability cover at a good rate and protection for up to 10 properties.