If you’re thinking of buying a property to rent or you’re switching your current property to a rental as part of a relocation, you’re going to need to know about the tax implications of doing so. With house prices at all time highs, mortgage rates on the increase and disposable incomes under pressure, the property rental market has been booming as individuals, couples and families choose to rent rather than buy.
Despite legislative changes that will target unscrupulous landlords and which have been designed to provide tenants with more rights, the rental market looks set to continue to dominate in the years ahead. If you own a property in a sought after location and can secure let-to-buy or buy-to-let finance, it can still be highly profitable, but because that profit is personal income it does come with a tax implication. So, plan ahead, understand what it looks like and you’ll avoid nasty surprises down the line when it comes to completing your tax return. Here are some answers to the key questions:
Is the profit on property classed as income
Yes. The profit that you make on renting a property does count towards your personal income, like part of your salary. Because it counts as income it is also taxed as such. This means that if your current income (e.g., salary) means you’re on the cusp of moving into another tax bracket, your property income could push you over the threshold, leaving you paying more tax overall. It’s worth working out what the profit will be on your property rental to assess the impact on your total personal income for the year and therefore your tax.
How do I calculate the profit on property income?
Not all rental costs can be deducted from the income to reduce the amount of profit you make. Most notable is the mortgage and mortgage interest. This does attract tax relief but does not reduce the profit. The profit is effectively the total income (rent) minus any direct costs required to let and maintain the property. So, if you have limited costs and a good rental figure, you may find that the profit, upon which you are taxed, is higher than you’d imagine.
What costs can be deducted from property rental profit?
The costs that you can deduct from the income to arrive at your profit have to be directly linked to the letting and maintenance of the property itself. Examples will include:
- Letting management fee e.g., if you use an agency
- Decorating
- Annual gas and electrical checks and certification
- Insurance – Normally buildings and renters insurance
- Replacement furnishings, but only where you let the property as furnished
- Gardening and external maintenance
- Legal fees
Are mortgage costs tax deductible on property rentals?
No. Mortgage repayments and interest cannot be deducted from the profit on property rentals. However, you do receive tax relief at 20% on the mortgage interest. So, if your mortgage interest payments are £300/month you will receive relief of £60, which is removed from your overall tax bill.
In a basic worked example with rental income of £1,800pcm with mortgage interest of £750 pcm and basic maintenance costs, the tax implication would look like this:
| Income | Monthly Value |
| Rental income | 1,800.00 |
| Total income | 1,800.00 |
| Deductible Expenses | |
| Letting Management Fee @ 10% of rent | 180.00 |
| Insurance(s) | 50.00 |
| Maintenance | 70.00 |
| Total Deductible Expenses | 300.00 |
| Profit (Income – Deductible Expenses) | 1,500.00 |
| Tax on profit (Basic rate tax payer) | 300.00 |
| Tax on profit (Basic rate tax payer) | 600.00 |
| Mortgage Costs | |
| Mortgage Interest | 750.00 |
| Tax relief at 20% (750 x 20%) | 150.00 |
| Total Tax payable (Basic rate tax payer) tax on profit – tax relief | 150.00 |
| Total Tax payable (Basic rate tax payer) tax on profit – tax relief | 450.00 |
We jointly hold a property, do we both pay tax on the income?
In theory yes. However, you can create a legal structure using a Trust Deed which nominates one party or the other to be the primary beneficiary of the taxable income on the property rental. This can be favourable if one party is a higher rate tax payer and the other a basic rate tax payer – as long as the property income does not take the basic rate tax payer above the threshold and into higher rate. By structuring it so that the basic rate tax payer becomes the beneficiary, the tax on profit will only be levied at basic rate (20%). The higher rate tax payer does not receive any of the income.
Do we need annual accounts for our property rental(s) or a limited company?
If you’re only letting one or two properties and your other sources of income are straightforward (salary, dividends and bank/investment interest) then no, you probably do not need to separate your properties out into a legal entity and manage all the compliance that goes with that. You should, however, have a separate bank account for your property income or, if practical, individual accounts for each property. The rental income should be paid into the relevant account and all costs associated with that property paid from it. This will make the process of calculating the tax easier and more transparent. You will of course be required to complete a personal tax return each tax year through the self-assessment system.
If you’re thinking of making this into a business and will be a professional landlord with a number of properties or you have a building with multiple flats, then yes, you should be looking at how your structure this. There are some nuances from a tax perspective that may mean the way you pay tax is structured differently, but one of the key reasons for putting a commercial ‘wrapper’ around multiple properties is more from a legal and risk liability perspective.
Do I have to pay tax if I don’t make any profit on my rentals?
If your deductible expenses mean that you do not actually make a profit on renting, then no, you do not have a tax implication – beyond your normal income tax. In this instance, if you have a mortgage, then any unused relief can be carried forward. It’s not uncommon for landlords to have individual years whereby they do not make a profit, for example during significant renovation works or where maintenance costs have been higher than usual. If it looks as though you’re not making a profit at all, unless it is a long term asset investment or you’re on a repayment mortgage, you should probably consider whether it is wise to consider letting your property.