Income Tax when you rent out a property: working out your rental income
Information on your tax obligations as a landlord and how to work out your rental income if you rent out properties in the UK.
You pay tax on any profit you make from renting out a property. The amount you pay depends on how much profit you make and your personal circumstances. Your profit is the amount left once you’ve added together your rental income and deducted any expenses or allowances you can claim. You need to tell HM Revenue and Customs (HMRC) when you make taxable profits from letting property, within six months after the end of the tax year in which you make them. If you do not, you may be liable to a penalty. If HMRC ask you to send in a tax return you will need to give details of your rental income and expenses for the tax year even if there is no tax to pay.
Whether you need to complete 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.
There’s further support available in the form of webinars, e-learning, emails and videos to help you get things right.
There are different rules you must follow if you are:
- 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.
Working out your rental income
Your rental income is mainly the rent you receive but it also covers any payment you get from your tenant for the use of furniture as well as charges for additional services you provide, such as cleaning of communal areas, hot water, heating, and repairs to the property.
If you’ve got 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.
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 - landlords’ policies for buildings, contents and public liability
- interest on a mortgage to buy the property
- 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 9/12ths 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 is not 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
The rules are slightly different and more complex where you have remortgaged against the value of your rental property.
If you increase your mortgage loan on your buy-to-let property you can also treat interest on the additional loan as a revenue expense but only up to the capital value of the property when it was brought into your letting business. Interest on any additional borrowing above the capital value of the property when it was brought into your letting business is not tax deductible.
Revenue expenses are allowable, which include the day-to-day running costs of the property, but you can’t claim ‘capital’ expenses.
Capital expenses is when you:
- add something to the property that wasn’t there before or 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.
Examples of capital expenses that wouldn’t normally be allowable include:
- adding an extension
- installing a security system if there wasn’t one before
- replacing a kitchen with one of a higher specification
- replacing carpet
- replacing a sofa
- replacing a fridge
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 an allowable expense as they’re not part of the property. But costs to repair them can be claimed against your rental income if you’re not claiming the wear and tear allowance.
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 will not be an allowable expense.
Expenses you can claim if your property is fully furnished - until 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 is no longer available for Income Tax purposes for the tax year 2016 to 2017 and subsequent years. You may instead be able to claim Replacement Domestic Item relief (please read guidance below for 6 April 2016 onwards).
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. So 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:
- moveable 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 is not a deductible expense so no relief is available for these costs. Relief is only available for the replacement item.
Is the new item 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. So 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 is not, the same or substantially the same as the old item.
Changing the functionally, say from a sofa to a sofa bed, means the replacement is not substantially the same as the old item.
Changing the material or quality of the item also means the replacement is not substantially the same as the old item. Say you upgrade from synthetic fabric carpets to woollen carpets, the replacement is not substantially the same as the old item so there has been an improvement.
Importantly, if the replacement item is a reasonable modern equivalent, say a fridge with improved energy efficient rating compared to the old fridge, this is not considered to be an improvement and the full cost of the new item is eligible for relief.
In the example above, 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 provided there was no improvement on the old sofa bed and the old sofa bed is no longer available for use in that dwelling house.
Calculating the amount of deduction
When you replace domestic items, your old item may be sold on or part exchanged for the new item.
Additionally, there may 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
Please read Income Tax when you rent out a property: case studies for a worked example.
Can I 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 is not 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 is not available.
You cannot claim the 10% Wear and Tear allowance while also utilising 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. But from 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 2015 to 2016 tax year the threshold was £4,250
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
Normally, property jointly owned by married couples and civil partners who live together must be split and taxed in equal shares.
Exceptionally, a different split can be used. 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 is not 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 allows the information to be presented to HMRC in a readable format.
Published: 19 October 2015
Updated: 28 October 2016
- Updates about expenses you can claim for the Replacement of Domestic Items relief.
- Guidance updated to reflect statutory obligations on individuals receiving income from property.
- Rent A Room exemption figure for 2016 amended to £7,500
- First published.