How rental income is taxed
By Ian Robinson
Article 1 of 4
How rental income is taxed
The way your income from property 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
- Let your UK home while you live abroad.
You can learn about all of these in this guide.
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%, 40% or 45%, 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
then 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. Our guide on working for yourself explains more about 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.
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're 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).
Find out more: The Which? Tax Calculator- use our tax calculator to check your 2015-16 tax bill and this year's self-assessment return.
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 (CGT) 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.
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.
Find out more: Capital gains tax explained - this guide covers all you need to know about paying tax on capital gains
- Last updated: April 2016
- Updated by: Ian Robinson