A Comprehensive Guide to Tax on Rental Income in the UK

Navigating the complexities of tax on rental income in the UK can be daunting for landlords. Whether you’re just starting out or you’re an experienced property owner, understanding your tax obligations is crucial.

This guide provides a detailed overview of what you need to know about rental income tax, including how it’s calculated, what you can deduct, and key tips for compliance.

What is Rental Income Tax?

Rental income tax is levied on the earnings you receive from renting out property. This could be residential properties, commercial properties, or even furnished holiday lettings. The tax is calculated on the net rental income after allowable expenses have been deducted from the gross rental income.

What Counts as Rental Income?

• Rent itself (from houses, flats, or even a room or parking space)
• Payments for services like utilities, cleaning of common areas, or gardening
• Repair charges
• Insurance payments made by tenants

Essentially, any income you receive related to letting out your property is considered rental income.

As a landlord, you must register with HM Revenue and Customs (HMRC) for self-assessment tax return if your rental income is more than £1,000 per annum. This can be done online and must be completed by the 5th of October in your business’s second tax year.

How to Calculate Tax on Rental Income

Your taxable rental income is the gross rental income you receive minus any allowable expenses incurred during the tax year.

Gross rental income is the total amount of rent and other receipts before any deductions. Allowable expenses are costs you can deduct from your gross rental income to arrive at your taxable rental income.

These include:

• Costs of maintaining and repairing the property, but not improvements
• Fees paid to letting agents or property managers
• Utility Bills and Council Tax (if these are included in the rent and paid by you)
• Insurance
• Costs for hiring legal advice or accountants, provided they relate to rental business.
• If you have a mortgage on the rental property, you can claim tax relief on the interest part of the mortgage repayments.
• For furnished properties, a percentage of the rental income can be claimed to cover the depreciation of furnishings.

Tax Rates and Allowances

Everyone has a personal allowance (£12,570 for the 2024/25 tax year), which is the amount of income you can earn each year without paying tax. Rental income is added to your other income to determine if it exceeds this allowance.

The rental income is taxed at the same rates as other income:

• Basic Rate (20%): Income over £12,570 and up to £50,270.
• Higher Rate (40%): Income over £50,270 and up to £125,140.
• Additional Rate (45%): Income over £125,140.

Reliefs and Exemptions

If your rental income is £1,000 or less, you do not need to declare it to HMRC or pay tax on it, as this falls under the property income allowance. However, if your income exceeds £1,000, you must report all of it.

Mortgage Interest Relief

From April 2020, landlords can no longer deduct mortgage interest payments from rental income to reduce the tax bill. Instead, they receive a tax credit, based on 20% of the mortgage interest payments.

The new system means higher or additional-rate taxpayers can no longer claim the tax back on their mortgage repayments, as the credit only refunds tax at the basic 20% rate, rather than the top rate of tax paid.

Calculating Your Tax on Rental Income: Example

Let’s walk through an example to illustrate how to calculate your tax on rental income:

Scenario

You own a rental property in the UK and receive a monthly rent of £1,000 from your tenants, totaling £12,000 per year.

Throughout the year, you incur the following allowable expenses:

• Letting agent fees: £1,500
• Mortgage interest: £4,000
• Repairs: £800

Step 1: Calculate Rental Profit

1. Total Rental Income: £12,000
2. Allowable Expenses:
   • Letting agent fees: £1,500
   • Mortgage interest: £4,000
   • Repairs: £800
   • Total Allowable Expenses: £1,500 + £4,000 + £800 = £6,300
3. Rental Profit: £12,000 (Total Income) – £6,300 (Total Expenses) = £5,700

Step 2: Consider Property Allowance

• The first £1,000 of your rental profit is tax-free due to the property allowance.
• Taxable Rental Profit: £5,700 (Rental Profit) – £1,000 (Property Allowance) = £4,700

Step 3: Apply Tax Rate (Assuming No Other Income)

• Similar to the previous example, we’ll assume you have no other income and fall within the basic 20% tax band.
• Tax on Rental Income: £4,700 (Taxable Profit) x 20% (Tax Rate) = £940

Therefore, in this scenario, you would pay £940 in income tax on your rental income.

Reporting and Compliance for Rental Income Tax

Understanding how to report your rental income and comply with tax regulations is crucial for landlords in the UK.

Here’s a breakdown of the key aspects:

When to Notify HMRC

You must inform HMRC about your rental income. The deadline for notification is by 5th October following the end of the tax year in which you started receiving rental income.

For instance, if you began receiving rent in the tax year running from April 6th, 2023 to April 5th, 2024, the deadline to notify HMRC would be October 5th, 2024.

Self Assessment Tax Return

You’ll need to file a Self Assessment tax return if either of the following applies:

• Your rental income falls within the range of £1,000 to £2,500 per year.
• Your rental profit exceeds £2,500 after deducting allowable expenses.

The deadline to submit your completed Self Assessment tax return (including reporting your rental income) is typically October 31st following the end of the tax year for paper submissions and January 31st for online submissions.

Making Tax Digital (MTD) – Upcoming Change

Making Tax Digital (MTD) is a new system for recording and reporting business income and expenses. While not currently mandatory for landlords with solely rental income, it’s important to be aware of the upcoming changes:

• A phased rollout is planned, starting from April 6th, 2026.
• Initially, it will only affect landlords with a gross rental income of £50,000 or more per year.
• From April 6th, 2027, the threshold will be lowered to £30,000 per year (unless exempt).
• Landlords meeting the income threshold will need to use MTD-compatible software to keep digital records and submit quarterly updates to HMRC.

Keeping Records

Maintaining good records is essential for complying with tax regulations. It’s recommended to keep the following for at least five years:

• Copies of tenancy agreements
• Receipts for rental income
• Documentation of allowable expenses (letting agent fees, repairs, mortgage interest, etc.)

Penalties for Non-Compliance

Failing to notify HMRC about your rental income or missing tax return deadlines can lead to penalties. It’s best to ensure you understand and meet your reporting obligations.

Paying Tax When You Sell a Rental Property

When you sell a rental property in the UK, you may be liable for a tax called Capital Gains Tax (CGT) on the profit you make.

CGT applies to the difference between the selling price and the purchase price of your property, minus any allowable expenses incurred during ownership. Unlike your main residence, selling a rental property doesn’t qualify for the full Private Residence Relief, which exempts you from CGT.

Calculating Your Chargeable Gain

1. Selling Price: The amount you receive from selling the property.
2. Purchase Price: The original cost of buying the property, including legal fees and stamp duty.
3. Allowable Expenses:
   • Costs associated with selling the property like estate agent fees.
   • Improvements made to the property during your ownership (certain limitations apply).
4. Chargeable Gain: Selling Price – Purchase Price – Allowable Expenses

Capital Gains Tax Rates

• The rate you pay depends on your total income for the tax year:
  • Basic Rate Taxpayer (up to £50,270): 18% on your chargeable gain.
  • Higher Rate Taxpayer (over £50,270): 28% on your chargeable gain.

Annual Capital Gains Tax Allowance

• You can deduct the annual Capital Gains Tax allowance (currently £3,000 for the tax year 2024-25) from your chargeable gain before calculating the tax owed.

Reporting and Payment

You must report any capital gains from selling your property to HMRC within 60 days of completion. You can usually pay your Capital Gains Tax online or by phone.

Tax on Income from a Property Overseas

Income from a property overseas is subject to UK tax regulations. If you are a UK resident, you are liable to pay UK tax on your worldwide income, including income from overseas properties.

If you’ve already paid tax on your overseas property income in the country where the property is located, you may be eligible for Foreign Tax Credit Relief. This prevents double taxation by allowing you to offset the foreign tax against your UK tax liability on the same income.

It’s important to note that income from overseas properties isn’t combined with UK property income. Instead, it’s considered as foreign income and must be reported separately in your self-assessment tax return.

Furnished Holiday Lettings

Furnished Holiday Lettings (FHL) have special tax rules in the UK, which can provide several advantages compared to other rental properties, both domestic and overseas.

Criteria for Qualifying as FHL

To qualify as an FHL, the property must meet the following criteria:

1. Furnished: The property must be furnished adequately for normal occupation and tenants must be able to use the furniture.
2. Availability Condition: The property must be available for commercial letting to the public for at least 210 days in a 12-month period.
3. Letting Condition: The property must be let to the public for at least 105 days in a 12-month period. Longer-term lettings of more than 31 days to the same tenant do not count toward this total.
4. Pattern of Occupancy Condition: If more than 155 days are let as longer-term lets, the property does not qualify as an FHL.

Tax Advantages of FHL

• Capital Allowances: You can claim capital allowances on furniture, furnishings, equipment, and fixtures in the property, reducing your taxable profits.
• Profits Treated as Earnings: FHL profits are treated as earned income, which can be beneficial for pension contributions.
• Loss Relief: Losses from FHLs can only be set against profits from other FHLs, not other types of rental income.
• Capital Gains Tax Reliefs: FHLs qualify for reliefs such as Business Asset Disposal Relief (previously Entrepreneurs’ Relief) and Roll-over Relief.

Navigating Tax on Rental Income

Navigating the tax obligations for rental income in the UK can seem overwhelming, but understanding the key aspects can significantly ease the process for landlords. From calculating taxable rental income and understanding allowable expenses to being aware of the various tax rates and reliefs, landlords can ensure compliance and potentially maximise their financial benefits.

For personalised guidance and expert handling of your rental income tax matters, consider exploring Mazuma’s accounting services.