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This guide has been produced for information purposes only. As a mortgage broker, we're not able to offer tax advice, but we can refer you to our partners Landlord Support Services who are able to advise. You can enquire with them here.
What don’t you know about the tax on rental income? Our guide gives landlords insight on how it’s applied, the rates you’ll pay and your allowances.
Buy-to-lets can be extremely lucrative so they attract a lot of entrepreneurial thinkers. They also intimidate masses of potential landlords because they’re taxed in a very specific way.
UK landlord tax comes in different forms: Stamp Duty Land Tax, Capital Gains Tax and Income Tax. These are the main 3. But you don’t pay them all at once. Stamp Duty you pay on the initial property purchase and you’re charged Capital Gains Tax when you sell an investment property. Income Tax is the only tax you’ll pay on an ongoing basis for an occupied buy-to-let property as a private landlord.
If you purchase a buy-to-let through a limited company in the UK, you pay Corporation Tax on the rental income. You can find more information on this below.
By becoming a landlord, you’re setting up an ongoing financial source – the rental income you receive from tenants. You pay tax on rental income like any other monthly earnings.
Rental income is classified as any money you receive from tenants for:
Income tax is the only tax private landlords pay on rental income. It has many names in the UK: landlord income tax, property income tax, buy-to-let income tax, etc. But these all refer to the same tax you pay every month.
You’re taxed on your net rental income, i.e. the profit you make; this is calculated by adding together all the rental income you receive from various properties and then subtracting any rental income tax allowances, relief or allowable expenses (total rental income minus property allowance or allowable expenses).
See Buy-to-Let Allowable Expenses below for more information on those landlord-only tax deductions.
Your Income Tax band determines the rate at which you’ll pay tax on rental income that year. You may receive income from a variety of sources, each of which are taxed differently. You need to be meticulous when you calculate your income if you want to work out how much tax is due.
The Income Tax rates and thresholds for your rental income are the same as those for your personal income. However, adding your net rental income to any other income you receive may push you over your usual tax threshold and into a new, higher band.
The Income Tax rates are:
|Income Tax Band||Taxable Income 2018 – 2019||Income Tax Rate 2018 - 2019||Taxable Income 2019 – 2020||Income Tax Rate 2019 - 2020|
|Personal Allowance||Up to £11,850||0%||Up to £12,500||0%|
|Basic Rate||£11,851 - £46,350||20%||£12,501 - £50,000||20%|
|Higher Rate||£46,351 - £150,000||40%||£50,001 - £150,000||40%|
|Additional Rate||£150,001 and above||45%||£150,001 and above||45%|
If your income is:
To figure out your Income Tax band, you:
The process of paying tax on buy-to-let property income isn’t too onerous, but how to go about it depends on the amount you receive in rent.
HMRC use self-assessment tax returns to collect Income Tax from people who receive income from sources other than their salary, e.g. income from rent. Therefore, landlords pay the tax due on rental income by completing a self-assessment tax return.
You fill out a self-assessment tax return every tax year, which runs from 6th April - 5th April. HMRC then use these figures to determine how much tax you need to pay. You must keep the receipts from any work you’ve had done on your property when you complete a tax return for a buy-to-let to claim any expenses.
There are 2 ways landlords can complete self-assessment:
Many landlords choose to complete their own tax return as it eliminates the cost of an accountant. Self-assessment isn’t a way to avoid landlord taxes. You need to be honest and thorough if you choose to complete your own self-assessment.
Not everyone knows how to file rental income on their taxes. By using an accountant, you’re minimising the worry that you’ll make a silly mistake. Your accountant will know how rental income is taxed, what you can claim and which receipts you need to keep. As a general rule, we suggest using an accountant with property taxation experience. They can guide you if there are some decisions to make regarding whether or not to own property in your personal name or in a limited company’s. You can find out in our guide: Limited Company Buy-to-Let Mortgages.
Landlords are taxed on their net rental income, i.e. the profit left over when you subtract your property allowance or allowable expenses from the total amount you receive in rent. HMRC have strict tax rules on the income from rental property, so there are limits as to what you can claim as a buy-to-let allowable expense.
From April 2017, the first £1000 you receive in rent from your tenants is tax-free rental income, otherwise known as your property allowance. This means that landlords who earn less than £1000 don’t have to worry about calculating expenses and reporting them to HMRC; they receive full tax relief on their rental income. There are some exceptions where deducting expenses is more useful to landlords earning under £1000, but this would depend on your individual circumstances.
If your rental income amounts to more than £1000 then you must complete a self-assessment tax return. You must also choose between receiving the property allowance or deducting expenses from your rental income.
Landlords who opt for the £1000 property allowance receive what’s known as partial relief on their Income Tax. Partial relief is useful if your deductible expenses are lower than £1000, as you’re able to claim a larger chunk of your rental income tax-free.
You don’t pay any tax on rental income allowable expenses, but there are set rules which stipulate what you can and can’t deduct. You can deduct expenses that are exclusively for the purposes of renting out the property and that you, not the tenant, pay for.
Mortgage interest payments – see below for more information
General maintenance and necessary repairs but not improvements
Replacement of some domestic items
Letting agent fees and management fees
Insurance, e.g. landlords’ policies for buildings, contents and public liability
Water rates, Council Tax, gas and electricity
Landlords who privately own a buy-to-let property are currently eligible for some tax relief on rental income if they pay mortgage interest on that property. However, the government are currently phasing out the amount of mortgage interest relief you can claim, simultaneously introducing a new relief. Sometimes this new relief is referred to as tax credits for landlords. We explain this in more detail below.
From 2020, landlords will no longer be able to claim mortgage interest tax relief. Instead, you’ll receive a basic rate reduction from your Income Tax liability for your finance costs.
To work out what you’d pay as a higher rate tax payer, you:
The transition is one of the biggest tax changes landlords face. For more landlord tax advice and an explanation of the phasing out process, see our Buy-to-Let Tax Changes guide.
Looking for tips on how to avoid landlord taxes isn’t the best idea, as the suggestions you’ll find are usually unreliable and more risk than they’re worth. Instead, make yourself aware of the allowances that suit your situation and discuss tax-efficiency with your accountant. You may learn how to pay less on tax on rental income than you first thought.
Some people find it more tax-efficient to purchase a buy-to-let in the name of their limited company, as the taxation of rental income from limited company-owned properties differs from those owned by landlords. You don’t pay any Income Tax on rental income from buy-to-lets owned by limited companies. You pay Corporation Tax. HMRC doesn’t take your personal income into account when determining the rate at which you’ll be charged Corporation Tax as it’s a fixed rate. Corporation Tax currently stands at 19% (2019 - 2020) and is applied to your overall business earnings.
This means it can work out cheaper, which is one of the main reasons many landlords are considering using a limited company, either now or in the future.
You also have more flexibility with the expenses you can claim on a limited company buy-to-let, since it’s considered part of your business rather than an investment.
Find out more in our Guide to Buy-to-Let Mortgages for Limited Companies.
Any advice on landlord tax relief and tax-efficiency should be sought from an accountant.
You pay Stamp Duty Land Tax (SDLT) whenever you purchase a property in the UK valued above £125,000. It’s not part of the tax payable on rental income; you pay Stamp Duty as a one-off cost at the time of purchase. You pay the same Stamp Duty on a second home as you would on a buy-to-let property because neither are your main residence.
Landlords and other individuals buying second properties in England and Northern Ireland pay extra Stamp Duty in the form of a 3% surcharge.
|Property Value||Standard SDLT Rate 2019 - 2020||SDLT Rate on Second Homes or Buy-to-Lets 2019 - 2020|
|Up to £125,000||0%||3%|
|£125,001 - £250,000||2%||5%|
|£250,001 - £925,000||5%||8%|
|£925,000 - £1,500,000||10%||13%|
|£1,500,001 and above||12%||15%|
Although you only pay Income Tax on the house rent received each month, there are other taxes you may have to pay at some point during your landlordship. It all depends on your circumstances.
As a landlord, you won’t pay the Council Tax on your buy-to-let properties unless they’re unoccupied. Council Tax is usually the responsibility of the tenant, but you may be liable if they leave. You can claim buy-to-let Council Tax as an expense when you complete your self-assessment tax return.
Landlords only pay Capital Gains Tax on the sale of a buy-to-let property. If you never sell your buy-to-let, then you don’t need to worry about paying Capital Gains Tax. You can find out more in our Capital Gains Tax guide.