With the tax return deadline just two weeks away, the Which? Money experts are answering your self-assessment queries. You can submit your questions to email@example.com, or via our Facebook or Twitter pages.
Q: I rent out my home because I have had to move and cannot sell it. Can I charge all the bills, running costs and repairs against any rental income earned?
Submitted via Which? Money Magazine.
A: In a quiet property market, it’s not uncommon for homeowners to find themselves becoming ‘accidental landlords’ – letting their property because they can’t sell it.
But regardless of whether you originally bought your property as a buy-to-let or decided to rent it out at a later date, you’ll need to pay tax on your rental income – and the tax relief available to landlords is changing.
How much tax will I pay?
Rental income is treated the same way as income you receive from employment or other sources. You’ll be taxed at 20% if you’re a basic-rate taxpayer, 40% as a higher-rate payer or 45% as an additional-rate payer.
But keep in mind that your rental income will be added to any other income you earn, which may push you into a higher tax band.
You need to pay tax on any ‘profit’ you make from the property. Profit is essentially the amount of income from your property minus any allowable expenses or deductions.
Your income is not just your rent, but any other payments made by tenants – including cleaning fees for communal areas or utility bills. If you keep a portion of the tenant’s deposit at the end of the tenancy, this will also count as income.
- Find out more: How rental income is taxed
What are allowable deductions and reliefs?
You can deduct the costs of running your rental property from the amount that you pay tax on. Allowable deductions include:
- Utility costs (water rates, council tax etc.)
- Contents insurance
- Services to clean communal areas
- Letting agents’ fees
- Accountants’ fees
- Ground rents and service charges
- Advertising costs
- Buildings insurance
But you can’t deduct ‘capital expenses’ – for example, making improvements or extending your property (though you may be able to use these costs to reduce your capital gains tax bill when you sell up.)
In previous tax years, you could claim a ‘wear and tear’ allowance on your property, but this was scrapped in April 2016.
Now, you can claim tax relief on replacing ‘domestic items’ that have worn out, including beds, carpets, crockery, curtains and white goods. It needs to be a like-for-like replacement though – if your £400 fridge breaks and you replace it with a £600 model, you can only deduct £400 from your income.
- Find out more: Allowable expenses and allowances
How does mortgage interest tax relief work?
For the 2016-2017 tax year, landlords can deduct their mortgage interest – which can be a hefty sum, given most landlords have interest-only mortgages – from their rental income. If you have a capital repayment mortgage, you can only claim on the portion of your mortgage payments that go towards interest.
But from 2017-2018, this relief is being scaled down so that landlords can only deduct 75% of their mortgage interest. This will drop to 50% in 2018-2019 and 25% in 2019-2020. From the 2020-2021 tax year, you won’t be able to deduct mortgage interest at all.
Over the same period, a 20% tax credit will be phased in on your mortgage interest. If you’re a basic-rate taxpayer, you’ll still receive the same rate of relief – but this could lead to you declaring a higher income, pushing you into a higher tax bracket. If you’re a higher- or additional-rate taxpayer, you’ll end up losing at least half of your relief.
- Find out more: Buy-to-let mortgage tax relief changes explained
How do I declare my rental income on my tax return?
You’ll need to notify HMRC if you’re receiving income from property, and you’ll probably need to fill in a self-assessment tax return.
Within your return you’ll need to detail all the sources of income from your property, as well as all the expenses and allowable deductions.
The deadline is 31 January, so don’t delay. If you’d like help filing your return, the Which? Tax Calculator allows you to tot up your earnings and file directly with HMRC.
Here, we explain how to submit your self-assessment tax return as a landlord.