For landlords, tax can be a minefield of information – and that’s before all the regular changes investors have to keep up with.
But understanding your tax liabilities as a landlord is hugely important and this guide will help you get to grips with everything from income tax and national insurance, to capital gains tax and stamp duty…
Income tax for landlords
If you generate an income from renting out property, you’ll almost certainly have to pay income tax on what you earn.
The amount you pay depends on what you earn from rental property, as well as any other income you may have.
What are the income tax rates for landlords?
Income tax rates in England for landlords are the same as they are for other forms of income.
That means you’ll pay:
• No tax on the first £12,500 of your income
• 20% tax on your income up to £50,000
• 40% tax on your income between £50,000 and £150,000
• 45% tax on any income over £150,000
Your first £1,000 of income from renting property is also tax-free if you’re self-employed, which is known as the ‘property allowance’.
Landlord income tax relief: What expenses can you claim?
As a landlord, you’ll incur a whole host of costs and expenses in order to let out your rental property, or properties.
Many of these can be deducted from your income to reduce your tax bill.
While allowable expenses can vary depending on what kind of property you’re letting out, residential landlords can claim:
• Business costs, such as phone expenses, travel and office costs
• Service fees, like accountancy costs, letting agent fees, conveyancing and surveys / valuation costs
• Ground rent on leasehold property
• The cost of any insurance policies, including buildings, contents and rent protection cover
• The costs of any repairs or replacement items for the property that aren’t classed as ‘improvements’, such as moveable furniture and furnishings, appliances, or kitchenware
• Cleaning or gardening expenses
• Utility bills or council tax when the property is empty
What you can’t claim as an expense
You can’t claim any costs associated with getting a property into a rentable condition or purchasing items before you rent it out.
Any improvements you make, for example installing a new kitchen, are also not allowed as deductible expenses for income tax purposes, although you can claim back any like-for-like costs.
For example, if you replace a fridge freezer worth £800 with one that costs you £1,200, you can only claim back £800 of that £1,200 cost – with the remaining £400 classed as an ‘improvement’.
Mortgage interest tax relief
Until 2017, you could claim mortgage interest as a deductible cost but that has now been phased out.
Instead, you can claim a 20% tax credit against the cost of your mortgage interest payments from your rental properties.
How do I pay tax on my property income?
To pay any tax due on your rental income, you’ll need to complete a self-assessment tax return annually and pay what you owe.
The deadline for paper-filed self-assessment tax returns is October 31 annually, while online tax returns must be filed before January 31.
If you earn between £1,000 and £2,500 through property rental income, you must inform HMRC and if you earn between £2,500 and £9,999, or you earn more than £10,000 after deducting any allowable expenses, you’ll need to complete a self-assessment tax return.
Income tax for rental properties in a limited company
If you rent out your property, or properties, as part of a limited company, you’ll pay corporation tax on any profits you make.
Any money you extract from your business by way of salary may mean you have to pay income tax through self-assessment, or through a PAYE scheme, while dividends you take from profits may also be subject to income tax through self-assessment.
National insurance for landlords
If your income from renting out property is classed as ‘running a business’, you may have to pay class 2 national insurance.
This could be the case if you let out more than one property, or if being a landlord is your main source of income.
If you earn more than £6,475 per year from renting out property, you’ll have to pay class 2 national insurance.
You can also make voluntary payments, which can help with ensuring you receive a full state pension.
Capital gains tax for landlords
If you decide to sell a rental property that’s not your main home, you may have to pay capital gains tax.
Capital gains tax is charged on the difference between what you paid for a property and what you sell it for.
What are the capital gains tax rates on property?
Capital gains tax is charged at 18% for property sales if you’re a basic rate income taxpayer.
If you’re a higher or additional rate income taxpayer, capital gains tax on property is charged at 28%.
However, the personal allowance for capital gains tax is £12,300 for the 2021/22 tax year, meaning you pay no tax on the first £12,300 ‘gain’ you make.
What allowable deductions from capital gains tax are there?
There are deductions you can make to reduce your capital gains tax liability when selling a rental property, including:
1. Private Residence Relief
If you previously lived in the property you subsequently rented out, you can get capital gains tax relief on the time you lived there, plus the final nine months before you sell it.
2. Lettings Relief
If you live in your rental property alongside a tenant, or tenants, you can claim lettings relief of £40,000 or the same amount of Private Residence Relief, if you’re entitled to it.
3. Allowable expenses
You can also deduct:
• Estate agency fees
• Solicitor’s fees
• Stamp duty from the original purchase
• The cost of any improvements made between buying and selling, including extensions, conversions or energy efficiency modifications
Stamp duty for landlords
Landlords and buyers of additional homes must pay a 3% stamp duty surcharge.
Until June 30, 2021, you’ll only pay the 3% surcharge on the first £500,000 of a property’s purchase price as part of the stamp duty ‘holiday’, which was extended in the spring 2021 Budget.
Between July 1 and September 30, that £500,000 threshold will reduce to £250,000, before stamp duty goes back to its pre-July 2020 rates from October 1.
From then, you’ll pay the following on any rental properties you buy:
Minimum purchase price
Maximum purchase price
Stamp duty rate
£1.5 million +
From April 2021, overseas buyers of property in England will pay an additional 2% surcharge.
Council tax when you’re a landlord: Who pays it?
More often than not, the tenants in a rental property are responsible for paying council tax, rather than landlords.
However, if you’re renting out a House in Multiple Occupation (HMO), where several individual tenants rent rooms, you would be responsible for paying your property’s annual council tax bill.
Are Landlord tax rules changing in 2021?
Tax changes were expected during the spring 2021 Budget as the treasury looks to balance the books following the Covid-19 pandemic – but many of the predictions failed to materialise.
Here’s an at-a-glance look at the taxes affecting landlords and where they stand for 2021/22…
The personal allowance will rise from £12,500 to £12,570 in April 2021 but will then remain frozen until April 2026.
The higher rate threshold will rise from £50,000 to £50,270 in April 2021 but will also remain frozen until 2026.
No changes were put in place for taxation on company dividends, with the personal allowance remaining at £2,000 for landlords whose properties are in a limited company structure.
Capital gains tax
Changes to capital gains tax were widely expected, but none materialised. The personal allowance remains at £12,300 and has been frozen until 2026.
Corporation tax, which landlords in limited companies pay on their rental profits, will rise from 19% to 25% after 2023.
However, companies earning less than £50,000 in profit will not be affected and will continue to pay 19%.
The amount of tax paid by businesses will then ‘taper’ up, with only those earning more than £250,000 in annual profit paying the top 25% rate from 2023.
If you’re thinking of becoming a landlord in 2021 or beyond, remaining compliant is key – take a look at these 10 reasons why using a letting agent is something you should consider.
Renting to students can also be a great property investment strategy – we’ve outlined everything you need to know about becoming a student landlord here.