Tax on property and rental income How rental income is taxed
The way your income is taxed differs depending on your situation. Here we explain the main rules. There are some variation to these rules in particular cases, such as:
- where you let a room or rooms in your own home
- let a property as a holiday home
- own foreign properties, or
- let your UK home while you live abroad.
How tax is calculated
You must normally pay income tax on any profit from renting out property you own. Put simply, your profit is the sum left once you’ve added together your rental income and deducted any allowable expenses or allowances.
Your income is primarily the rent you receive but also covers any separate sums you get from the tenant for the use of furniture, as well as charges for services normally provided by a landlord, such as cleaning of communal areas, provision of hot water and heating and arranging repairs to the property.
If you have several properties, all rental receipts and expenses can be lumped together, so expenses on one property can be deducted from receipts on another.
The only caveat to this is that overseas properties are treated separately to UK properties, so you can’t lump together your UK holiday let and your Spanish property.
What tax rate will I pay?
Your rental profits are taxed at the same rates as income you receive from your business or employment – 20% or 40%, depending on which tax band the income falls into.
Paying your tax
You have to pay tax on the profits you make in each tax year – these run from 6 April, to 5 April the following year.
You must declare rental income for the tax year it’s due, even if you’re not paid until the tax year is over. In terms of expenses, you can deduct any allowable expenses which relate to work done for a particular tax year – it doesn’t matter whether you pay the bill before or after the end of the tax year.
Rental income vs trading income
If you provide services not normally offered by a landlord such as:
- cleaning of rooms when let,
- a regular laundry service, or
- regular meals
this income will usually be treated separately as trading income rather than rental income.
The whole of your income will be treated as trading income if you run a hotel, B&B or guesthouse (see Tax on overseas property).
See Working for yourself for more information on how trading income is taxed. Alternatively, you can claim rent-a-room relief even if you’re trading, providing you let furnished accommodation in your own home. See Letting a room in your home for more information. HMRC also produces a useful helpsheet on rent-a-room for traders.
Your tax return
If you don't already receive a tax return, you must notify HMRC of any rental income by 5 October after the end of the tax year (5 April). You will usually need to fill in a tax return if you get money from renting out property. Unless you receive a tax return, 5 October is also the deadline for notifying your tax office if you have sold a property and made a taxable capital gain. The deadline for making a paper tax return is 31 October. For an online return the deadline is 31 January.
Main tax return
If your total income from UK property is £15,000 or more for the tax year, you must complete the main tax return. If it’s under this limit, you may be able to complete the shorter four-page return if HMRC invites you to do so. And if it’s under £2,500 HMRC may be able to collect the tax through the PAYE system if you already pay tax in this way – ask your tax office to send you form P810.
If you are running a trade such as hotel, guesthouse or a B&B, you’re treated as being self-employed and need to fill in the Self-employment pages.
This also applies if some of your income is treated as trading income (see rental income vs trading income, above).
Losses from UK rental properties can be carried forward to set against future profits from your UK properties.
Tax when you sell
You’ll usually have to pay capital gains tax when you sell the property you have been letting. 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. For more information see Capital gains tax (CGT) explained.
For more expert advice on how to reduce your capital gains tax, read the Which? Essential Guide: Tax Handbook 2011/12.