Use this guide to find out your tax obligations as a landlord, and how to work out your rental income if you rent out property.
You must pay tax on any profit you make from renting out property. How much you pay depends on:
- how much profit you make
- your personal circumstances
Your profit is the amount left once you’ve added together your rental income and taken away the expenses or allowances that you can claim.
You must contact HMRC if you have taxable profits from your property you rent.
If you’ve not told us about your property rental previously, you need to do so by 5 October following the tax year you had taxable rental profits.
If you’re also employed and your rental profits are small enough, you can ask HMRC to deal with your profits by adjusting your PAYE code.
You must report your profits on a Self Assessment tax return if HMRC ask you to. We’re likely to do this if your income is:
- £2,500 to £9,999 after allowable expenses
- £10,000 or more before allowable expenses
Whether you need to fill in a tax return will depend on the total rents you get and the profit you make. It will also depend on any other income you’ve had or may get, for example, from employment or pensions.
If HM Revenue and Customs (HMRC) ask you to send in a tax return you must give details of your rental income and expenses for the tax year even if you’ve no tax to pay.
If you’re not registered for Self Assessment
If you don’t usually send a tax return, you need to register for Self Assessment by 5 October following the tax year you had rental income. If you don’t, you could be charged a penalty.
There are different ways to register if you’re:
You should allow enough time to complete the registration process so you can send your return by the deadline.
There’s more help available in the form of HMRC webinars, e-learning, emails and videos to help you get things right.
How to calculate your taxable rental profits
There are different rules to follow if you’re:
- renting a room in your home
- letting a property as a furnished holiday letting
- renting out foreign property
- letting a property in the UK while you live abroad
Rates of tax
The rate of tax you pay depends on your total income for the year including any income from employment, self-employment or pensions.
Changes to tax relief from 6 April 2017
The amount of Income Tax relief some landlords can get on residential property finance costs will start to be restricted to the basic rate of tax from 6 April 2017.
You’ll be affected if you’re a:
- UK resident individual that lets residential properties in the UK or overseas
- non-UK resident individual that lets residential properties in the UK
- individual who let such properties in partnership
- trustee or beneficiary of trusts liable for Income Tax on the property profits
All residential landlords with finance costs will be affected, but only some will pay more tax.
You won’t be affected by the introduction of the finance cost restriction if you’re a:
- UK resident company
- non-UK resident companies
- landlord of Furnished Holiday Lettings
You’ll continue to receive relief for interest and other finance costs in the usual way.
What’s included under the finance cost restriction
The finance costs that will be restricted include interest on:
- loans - including loans to buy furnishings
Other costs affected are:
- alternative finance returns
- fees and any other incidental costs for getting or repaying mortgages and loans
- discounts, premiums and disguised interest
If you take a loan for both residential and commercial properties, you’ll need to use a reasonable apportionment of the interest to work out your finance costs for the residential properties.
Only the finance costs for the residential property business are restricted. This also applies if your loan was partly for a self-employed trade and partly for residential property.
Phasing in the restriction
The restriction will be phased in gradually from 6 April 2017 and will be fully in place from 6 April 2020.
You’ll still be able to deduct some of your finance costs when you work out your taxable property profits during the transitional period. These deductions will be gradually withdrawn and replaced with a basic rate relief tax reduction.
You’ll be able to use some of your finance costs to work out your property profits and use your remaining finance costs to work out your basic rate tax deduction:
|Tax year||Percentage of finance costs deductible from rental income||Percentage of basic rate tax reduction|
|2017 to 2018||75%||25%|
|2018 to 2019||50%||50%|
|2019 to 2020||25%||75%|
|2020 to 2021||0%||100%|
Work out your rental income
Your rental income is mainly the rent you get but also covers payments you get from your tenant for:
- the use of furniture
- charges for additional services you give such as:
- cleaning of communal areas
- hot water
- repairs to the property
If you’ve more than one UK property, you need to add together all your rental receipts and expenses and treat them as one business when working out your profit or loss.
Different rules apply if your property business includes profits from overseas properties, or commercial letting of furnished holiday accommodation in the UK or in the European Economic Area (EEA). The profits and losses for these must be worked out separately from other rental properties.
When you work out your taxable rental profit you can deduct allowable expenses from your rental income. The expenses must be wholly and exclusively for the purposes of renting out the property. This means that if an expense wasn’t incurred for the purpose of your property rental you can’t offset the cost against the rental income.
The expenses must also be revenue, rather than capital expenses.
You can claim expenses for the interest on a mortgage to buy the property. Read about changes to tax relief from 6 April 2017 if you have a loan on a residential let property.
Other common types of expenses you can deduct if you pay for them yourself are:
- general maintenance and repairs to the property, but not improvements (such as replacing a laminate kitchen worktop with a granite worktop)
- water rates, council tax, gas and electricity
- insurance, such as landlords’ policies for buildings, contents and public liability
- costs of services, including the wages of gardeners and cleaners
- letting agent fees and management fees
- legal fees for lets of a year or less, or for renewing a lease for less than 50 years
- accountant’s fees
- rents (if you’re sub-letting), ground rents and service charges
- direct costs such as phone calls, stationery and advertising for new tenants
- vehicle running costs (only the proportion used for your rental business)
Expenses you can’t claim a deduction for include:
- the full amount of your mortgage payment - only the interest element of your mortgage payment can be offset against your income
- private telephone calls - you can only claim for the cost of calls relating to your property rental business
- clothing - for example if you bought a suit to wear to a meeting relating to your property rental business, you can’t claim for the cost as wearing the suit is partly for your rental business and partly to keep you warm - no identifiable part is for your property rental business
- personal expenses - you can’t claim for any expense that was not incurred solely for your property rental business
Claiming part expenses
You might incur a cost where only part of it is expense for your property rental business. If a definite part of a cost is expense incurred wholly and exclusively for the property business, you can deduct that part.
For example, if a property is used for private purposes for 3 months and commercially let for 9 months, then 9/12 of the mortgage interest can be deducted from the rental income.
Only the interest part of the mortgage payment can be treated as an expense when working out your rental profit or loss for tax purposes. If you have a repayment mortgage, the capital repayment part of any payments isn’t an allowable deduction.
This means that the mortgage interest may be less than the full monthly payment you make, as your mortgage repayments may include repayment of capital.
Your mortgage provider will usually send you a mortgage statement each year. You can use this statement to work out how much mortgage interest you can claim as an expense when working out your rental profit for the year.
Increasing your mortgage
If you increase your mortgage loan on your buy-to-let property you may be able to treat interest on the additional loan as a revenue expense, as long as the additional loan is wholly and exclusively for the purposes of the letting business.
Interest on any additional borrowing above the capital value of the property when it was brought into your letting business isn’t tax deductible.
If the mortgage is for a residential property then the restrictions on interest from April 2017 will apply.
Revenue expenses are allowable, which include the day-to-day running costs of the property, but you can’t claim ‘capital’ expenses.
Expenses are generally ‘capital expenses’ if they will be used in the business over a longer period of time, such as when you:
- add something to the property that wasn’t there before
- alter, improve or upgrade something that was existing
- include the purchase of furnishings and equipment for the property
Capital expenses aren’t allowable and can’t be claimed against your rental income but you should keep records of them as you might be able to set them against Capital Gains Tax if you sell the property in the future.
These are examples of capital expenses that wouldn’t normally be allowable:
- adding an extension
- installing a security system if there wasn’t one before
- replacing a kitchen with one of a higher specification
See what qualifies for replacement domestic item relief from April 2016.
Costs of maintenance and repairs
Allowable revenue expenses include the costs of maintenance and repairs to the property (but not ‘capital’ improvements).
A repair restores an asset to its original condition, sometimes by replacing parts of it. Property repairs can include replacing roof tiles blown off by a storm, replacing a broken-down boiler or redecoration between tenants to restore the property to its original condition.
Replacing a part of the property with the nearest modern equivalent is still a repair if the improvement is incidental to the repair, such as replacing a single-glazed window with a double-glazed window.
If you have an insurance policy that covers the cost of some repairs to your property, you can only claim the additional expenses that you incurred for repairs which the insurance pay-out did not cover.
This also applies if you keep your tenant’s deposit from a Tenancy Deposit Scheme to cover damages they have caused to the property. You can only claim expenses incurred for repairs in excess of the amount of the deposit that you retained.
You can’t claim the costs for replacing furnishings or equipment in a property. These aren’t allowable as costs of maintenance and repairs, but from 6 April 2016 they may qualify for replacement of domestic items relief.
The costs of renewing fixtures such as baths, washbasins or toilets are normally allowable. These are considered to be repairs to the building as long as they are a like-for-like replacement and not an improvement.
The cost of replacing some small items, such as cutlery, crockery, cushions, bed linen and similar is also allowable if you are not claiming the wear and tear allowance. The items have to be of low value, have a short useful life, and need to be replaced regularly (almost annually) to qualify.
Carrying out work on a property before leasing or renting
Sometimes costs of work on a property before you lease or rent it will be capital expenses, and so are not allowable expenses. This includes if you buy a property in a derelict or run-down state, and either you paid a substantially reduced price for it or it was not in a fit state for rental.
Any works undertaken to put it back into a fit state for letting are unlikely to be repair works - they will be capital works as they improve the property. The costs for these works won’t be an allowable expense.
Expenses you can claim if your property is fully furnished - to 5 April 2016
If the property you let out is fully furnished, you can elect to claim a wear and tear allowance. A fully furnished property is one let with enough furniture, furnishings and equipment for normal residential use.
Wear and tear allowance isn’t available for Income Tax purposes from 6 April 2016. You may be able to claim Replacement Domestic Item relief instead.
The wear and tear allowance is 10% of the net rent.
The net rent is rental income less any costs you pay that a tenant would usually pay, such as council tax or utility bills like gas, water, and electricity.
The 10% wear and tear allowance covers things like:
- movable furniture or furnishings, such as beds or sofas
- fridges, freezers, and other white goods
- carpets and floor-coverings
- crockery or cutlery
- tables and other similar furniture
If you do claim the 10% wear and tear allowance, then you can’t claim the cost of repairing furniture and equipment covered by the allowance or for renewing small items such as broken crockery or missing cutlery.
If you’re sub-letting the property from another landlord, the wear and tear allowance can only be claimed by the landlord that furnished the property. If you didn’t provide the furniture you can’t claim the wear and tear allowance.
Expenses you can claim for replacement of domestic items - from 6 April 2016
If you let out residential property (a dwelling house) you may be able to claim a deduction for the cost of replacing domestic items such as:
- movable furniture for example beds, free-standing wardrobes
- furnishings for example curtains, linens, carpets, floor coverings
- household appliances for example televisions, fridges, freezers
- kitchenware for example crockery, cutlery
Replacement of Domestic Items relief is only available for expenses incurred from 6 April 2016 for Income Tax purposes.
Unlike the Wear and Tear allowance, for the Replacement of Domestic Items relief to apply the dwelling house can be unfurnished, part furnished or fully furnished. However, an expense must actually be incurred on purchasing a replacement domestic item, ‘the new item’.
The new item must also be solely provided for use by the tenants in a dwelling house and the old item must no longer be available for use in that dwelling house.
The initial cost of purchasing domestic items for a dwelling house isn’t a deductible expense so no relief is available for these costs. Relief is only available for the replacement item.
How to decide if the new item is an improvement on the old asset
Where the new item is an improvement on the old item, for example replacing a sofa with a sofa bed, the allowable deduction is limited to the cost of purchasing an equivalent of the original item.
If a new sofa would have cost you £400 but a sofa bed cost you £550, you could only claim the £400 as a deduction and no relief is available for the £150 difference.
When considering if the new item is an improvement on the old asset, the test is whether the replacement item is or isn’t, the same or substantially the same as the old item.
Changing the functionally (from a sofa to a sofa bed for example) means the replacement isn’t substantially the same as the old item.
If you later purchase a replacement sofa bed for use in that dwelling house, you would be able to claim the full cost of this new sofa bed. This is as long as there was no improvement on the old sofa bed and the old sofa bed is no longer available for use in that dwelling house.
Changing the material or quality of the item also means the replacement isn’t substantially the same as the old item. If you upgrade from synthetic fabric carpets to woollen carpets, the replacement isn’t substantially the same as the old item so there has been an improvement.
If the replacement item is a reasonable modern equivalent, for example a fridge with improved energy efficient rating compared to the old fridge, this isn’t considered to be an improvement and the full cost of the new item is eligible for relief.
How to calculate the amount of deduction
When you replace domestic items, your old item may be sold on or part exchanged for the new item.
There may also be incidental costs of disposing of the old item or acquiring the replacement item.
Therefore the amount of the allowable deduction for the new item, is:
- the cost of the new replacement item, limited to the cost of an equivalent item if it represents an improvement on the old item (beyond the reasonable modern equivalent) plus:
- the incidental costs of disposing of the old item or acquiring the replacement less
- any amounts received on disposal of the old item
Read Income Tax when you rent out a property: case studies for a worked example.
Who can claim Replacement of Domestic Items relief
If you replace a domestic item in a property which qualifies as a Furnished Holiday Let, Replacement of Domestic Items relief isn’t available. You will continue to be able to claim capital allowances on these items.
If you use the Rent a Room Scheme, Replacement of Domestic Items relief isn’t available.
You can’t claim the 10% Wear and Tear allowance while also using the Replacement of Domestic Items relief.
The Rent a Room Scheme
If you use the Rent a Room Scheme you don’t have to keep a record of your expenses if you don’t intend to claim them under the scheme.
From 6 April 2016 if the rent you receive is more than £7,500 (or £3,750 if the property is jointly owned) you can opt to pay tax on your profit in the normal way by deducting your expenses from the rent received.
For the tax year from 6 April 2015 to 5 April 2016 the threshold was £4,250, or £2,125 if the property was owned jointly.
If the allowable expenses are greater than your rental income you will have made a loss. In general, you can only offset that loss against any profits that arise from the same rental business in future years.
If more than one property is being let out, the income and expenditure from all properties are combined to determine an overall profit or loss for the year.
This means that expenses incurred on one property can be offset against income from another. This also means that if there is a loss from one property it’s automatically offset against the profits from another.
The exceptions to this are when you are working out the profit from your overseas properties or your furnished holiday lettings as separate rules apply to these types of properties. If you have properties that you are letting as a furnished holiday let you should refer to Helpsheet 253 for more information.
Losses from uncommercial lets
Relief for losses is only available if the loss arises from commercial letting. If you let out a property on terms that aren’t commercial, such as to a friend or a relative for a reduced rent, expenses incurred can only be deducted up to the amount of the rent received for that property.
This will mean you don’t make a profit or a loss.
You can’t use any excess expenses in a later tax year, even if you subsequently start charging commercial rent in that tax year.
If HMRC ask you to send in a tax return you need to give details of your rental income and expenses even if you have made a loss in the year.
If you’re renting out properties overseas you must keep the income and expenses separate from any UK property rentals.
You’ll need to make separate returns for your UK and non-UK properties and losses incurred on one can’t be set against profits from the other.
When you stop renting property
When your rental business ends, any losses that have been carried forward are usually lost as they can’t be set against any other income. If you start to rent out property again within 3 years you will usually be able to set earlier property losses against any profits from the new property.
You can share ownership of rental property with other people but how the rental income is taxed will depend on your share of the property.
Property jointly owned with spouse or civil partner
Property jointly owned by married couples and civil partners who live together will be taxed in equal shares, unless you decide to split ownership differently.
If you own the property in different shares, you can use a different split. If you own the property in unequal shares, and are entitled to the income in the same unequal shares, the income can be taxed on that basis. You both need to notify HMRC.
Property jointly owned but not with a spouse or civil partner
If you own a property jointly with another person who isn’t your spouse or civil partner your share of the rental profits or losses will usually be based on the share of the property you own. More detailed guidance is available about jointly owned property and partnerships.
You’ll have to keep accurate records of rent received and your expenses incurred to work out the profit you’ll pay tax on.
Your records must separate your income from fully-furnished lettings and unfurnished or part-furnished lettings (if you use the 10% wear and tear allowance), holiday lettings, rent a room and overseas lettings. This is because there are different tax rules for each type of rental income.
HMRC can charge you a penalty if your records aren’t accurate, complete and readable or if you don’t retain them for the required period of time. You may also have to pay a penalty if you submit an inaccurate tax return.
Your records you should keep could include rent books, receipts, invoices, bank statements and mileage logs (for journeys that are solely for your property business purposes).
How to keep your records
Most records can be kept electronically (on a computer or any storage device such as disk, CD, memory stick or microfilm) as long as the method you use captures all the information on the document (front and back) and can be presented to HMRC in a readable format.