How tax on rental income 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.
And if you have a mortgage on the property you let out, you can include some of the mortgage interest you incur as an expense, but that's changing over the next few years. You can find out more in our guide to buy-to-let mortgage tax relief.
Our short video explains how tax on rental income works.
What counts as rental income for landlords?
Your income is primarily the rent you receive, but also covers any other payments from tenants for services normally provided by a landlord. These include:
- Cleaning of communal areas
- Utility bills - including hot water, heating, broadband and water
- Arranging repairs to the property
If you charge any non-refundable deposits for your property these will also count as rental income, as will money that's kept over from a returnable deposit at the end of the tenancy.
What rental income is taxable: an example
For example, a landlord charging £750 per month rent, inclusive of bills would need to recognise the whole amount as income (though some of these costs could be charged as expenses).
If, at the end of the tenancy, the tenant agreed to forfeit £500 of their deposit to cover repairs to the property, this would count towards the rental income. Though the rent would be £9,000 for the year, the landlord would need to declare their income as £9,500.
- Get a head start on your 2017-18 tax return with the Which? tax calculator. Tot up your tax bill, get tips on where to save and submit your return direct to HMRC with Which?.
Tax on rental income from multiple properties
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.
However, if you own properties and also own a share of a rental business that profits from letting out properties, it's important to note that these will be treated as two separate rental businesses - and you won't be allowed to offset losses on one against profits from another.
Similarly, overseas properties are treated separately to any properties you hold in the UK, so you can’t lump together your UK holiday let and your Spanish property. There's a separate section in your tax return for declaring profits from overseas property.
How much tax will I pay on my rental income?
Your rental profits are taxed at the same rates as income you receive from your business or employment – 0%, 20%, 40% or 45%, depending on which tax band the income falls into.
Your rental income gets added to any other income you earn, which could tip you into a higher tax bracket. For example:
- You earn £40,000 a year from your job
- You make £10,000 in profit from a rental property
- This tips you over the £45,000 threshold for higher-rate tax (in 2017-18)
- You'll pay 40% on the £5,000 above this threshold
When do I pay tax on rental income?
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. 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 within your own home.
Completing a tax return for rental income
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 earn 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.
Find out more: use our tax calculator to check your 2017-18 tax bill and file this year's self-assessment return directly to HMRC.
Main tax return
If your total income from UK property is £10,000 or more for the tax year before expenses, you must complete the main tax return.
You'll also need to complete a tax return if your rental income is above £2,500 after deducting rental expenses.
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 – through your salary or pension, for example. 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).
Declaring losses on rental income
Losses from UK rental properties can be carried forward to set against future profits from your UK properties.
So if in the 2016-17 tax year, you received rental income of £8,000, but had (claimable) expenses worth £10,000, you would record a £2,000 loss for the year.
You're not allowed to offset this against your tax bill from other sources of income, such as dividends or pension income, for the year.
Instead, if you went on to make rental profits of £5,000 in the 2017-18 tax year, you could deduct your previous £2,000, so you'd only owe tax on rental profits of £3,000.
If, in this example, you'd only made rental profits of £1,000 in 2017-18, you could recognise £1,000 of your previous losses, and the unclaimed remaining £1,000 loss could be claimed in the 2018-19 tax year.
Paying tax when you sell a rental property
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, and you'll pay either 18% (if you're a basic-rate taxpayer) or 28% (if you're a higher or additional-rate taxpayer).
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 nine and 18 months to pay. The government has announced that from 2019 onwards, CGT on property sales will be payable within 30 days.
Find out more: Capital gains tax on property explained in full
Get expert buy-to-let mortgage advice
Before taking out a buy-to-let mortgage, it can be helpful to talk to a professional adviser. For impartial advice on the best mortgage for you from an expert who doesn't work on commission, call Which? Mortgage Advisers on 0800 197 8461 or request a call back using the form below.