Not all landlords have large numbers of multi-occupancy properties. Maybe you’ve inherited a property and want to let it out, rather than sell. Or perhaps you’ve taken advantage of the Stamp Duty holiday and are purchasing a buy-to-let property to bolster your future financial security.
As a brand new landlord, you need to get up to speed with lots of different regulations straightaway. Particularly if you’re not hiring a property manager or letting agent to take care of things for you.
We know tax is just one of the things you have to get your head round. And if you’ve only ever paid income tax through PAYE, then the thought of plunging into self assessment can be quite daunting. This short list of new landlord tax essentials will get you on the right track.
New rental income and your tax rate
The profit you make from renting out your property becomes part of your overall annual taxable income. In other words, it’s added together with all your other income streams: salary, savings, investments and pension.
This is where your tax rate may change. If you’re at the top end of the Basic Rate, the additional rental income may push you into the Higher Rate tax band. But this higher percentage is only payable on the amount over the threshold. The rest of your income remains taxed at the lower rate.
It’s not just the rent you collect. Other money you might get from your tenants is also likely to be considered taxable income.
You pay the council tax bill and reclaim it from your tenants. This amount counts as taxable income.
There’s absolutely nothing wrong with doing this, or charging for a service you provide to your tenants. But you need to be careful how you record it.
Your new landlord expenses
Tax wise, it’s not all bad for landlords. There are two main things you can do to maximise your tax efficiency.
- Keep a detailed list of all your expenses. You can deduct many of the maintenance and running costs as a business expense (even if it doesn’t feel like you’re ‘running a business’). Such as:
- Council tax
- Advertising and marketing
- Legal fees
- Accountancy fees
- HMRC has a full range of different tax reliefs and allowances you can claim on other expenses.
- Mortgage interest payments: you can apply for 20% tax relief on a buy-to-let mortgage. So unfortunately, by definition, this doesn’t apply to inherited properties.
- Replacing items in the property: this only applies to the replacement of things already in the home, not to the cost of kitting it out from scratch. And you can only get tax relief on a like-for-like purchase. If you decide to upgrade an appliance (for example), you can still claim tax relief on the proportion of the cost that matches the like-for-like amount.
It’s wise to get professional help with this, partly so you don’t miss out on anything you’re entitled to. And partly so you don’t accidentally claim for something that isn’t allowable. Mistakes can result in a hefty financial penalty.
But how do I pay this extra landlord income tax?
If the profit from your rental income is under £2,500, then you can arrange for HMRC to take any extra tax you owe through the PAYE system.
If your profit is over £2,500, or you earn over £10,000, you’ll need to complete a self assessment tax return. For taxpayers that have always been in PAYE, this can be an unappealing prospect. But HMRC have worked hard to streamline and digitise their systems, which makes it a lot more accessible.
Key points for those new to self assessment:
- The vast majority of taxpayers in self assessment register and submit their tax returns online. You need to allow at least three weeks when you first register. The security precautions require you to receive a personalised identification code and the necessary activation code in two separate letters.
- The tax year runs from the 6th April of one year, to the 5th April the following year. The deadline to file your self assessment tax return is 31st January after that. So, for this 2021-22 tax year, your tax return filing deadline is 31st January 2023. This is also the deadline for paying the corresponding tax bill. There are penalties if you don’t meet the deadlines.
- You don’t have to do this yourself. If you want to, you can appoint an accountant or tax professional as your ‘tax agent’ and then they can complete and submit your tax returns on your behalf. You’ll still need to give them all the necessary information of course.
- You apply for any tax reliefs and allowances at the same time, on the same tax return.
A self assessment tax return is just another way of communicating with HMRC. It doesn’t contain trick questions. It’s asking for information about your income – in this case from property rental – to be presented in a particular way. And it’s just information you already have; what you earn, what you spend and your profit.
The key with self assessment is to be organised from the start. Keep all the receipts and invoices for your expenses. Make sure you have an accurate record of the rent payments you take, along with any other money the tenants pay you.
The biggest thing to avoid is penalties. No one wants to waste any money on that. And they’re most often given for missing HMRC deadlines. So find out what you need to do to be ready. Get the registration process started immediately. You can submit your self assessment tax return any time after the tax year ends – you shouldn’t wait until 30th January. And consult a professional if you’ve got any doubts.