6. Paying tax and National Insurance

When you start renting out property, you must tell HM Revenue and Customs (HMRC) and you may have to pay tax. If you don’t, you could be charged a penalty.

If you contact HMRC first about any tax you owe, they may consider your case more favourably.

Running a property business

You’ll also have to pay Class 2 National Insurance if what you do counts as running a property business, eg if all of the following apply:

  • being a landlord is your main job
  • you rent out more than one property
  • you’re buying new properties to rent out

You don’t pay National Insurance on your rental income if you’re not running a property business - even if you do work like arranging repairs, advertising for tenants and arranging tenancy agreements.

Property you personally own

You must report income from property rental of more than £2,500 a year on a Self Assessment tax return.

If it’s less than £2,500 a year, call the Self Assessment Helpline to report it.

Property owned by a company

Count the rental income the same way as any other business income.

Costs you can claim to reduce tax

There are different tax rules for:

  • residential properties
  • furnished holiday lettings
  • commercial properties

Residential properties

You or your company must pay tax on the profit you make from renting out the property, after deductions for ‘allowable expenses’.

Allowable expenses are things you need to spend money on in the day-to-day running of the property, like:

  • letting agents’ fees
  • legal fees for lets of a year or less, or for renewing a lease for less than 50 years
  • accountants’ fees
  • buildings and contents insurance
  • interest on property loans
  • maintenance and repairs to the property (but not improvements)
  • utility bills, like gas, water and electricity
  • rent, ground rent, service charges
  • Council Tax
  • services you pay for, like cleaning or gardening
  • other direct costs of letting the property, like phone calls, stationery and advertising

Allowable expenses don’t include ‘capital expenditure’ - like buying a property or renovating it beyond repairs for wear and tear.

Furnished residential lettings

You can claim 10% of the net rent as a ‘wear and tear allowance’ for furniture and equipment you provide with a furnished residential letting. Net rent is the rent received, less any costs you pay that a tenant would usually pay, eg Council Tax.

Furnished holiday lettings

For furnished holiday homes, you may be able to claim:

  • plant and machinery capital allowances on furniture, furnishings, etc in the let property, as well as on equipment used outside the property (like vans and tools)
  • Capital Gains Tax reliefs - Business Asset Rollover Relief, Entrepreneurs’ Relief, relief for gifts of business assets and relief for loans to traders

You can only claim these if all the following apply:

  • the property is offered to let for at least 210 days a year
  • it’s let for more than 105 days a year
  • no single let is more than 31 days
  • you charge the going rate for similar properties in the area (‘market value’)

If you own the property personally, your profits count as earnings for pension purposes.

You can download helpsheets to help you with your tax return:

Commercial properties

You can claim plant and machinery capital allowances on some items if you rent out a commercial property - like a shop, garage or lock-up.

Working out your profit

You work out the net profit or loss for all your property lettings (except furnished holiday lettings) as if it’s a single business. To do this, you:

  • add together all your rental income
  • add together all your allowable expenses
  • take the expenses away from the income

Work out the profit or loss from furnished holiday lettings separately from any other rental business to make sure you only claim these tax advantages for eligible properties.

Making a loss

Deduct any losses from your profit and enter the figure on your Self Assessment form.

You can offset your loss against:

  • future profits by carrying it forward to a later year
  • profits from other properties (if you have them)

You can only offset losses against future profits in the same business.