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Do Landlords need to file a tax return?

Thursday, May 31, 2018
Do Landlords need to file a tax return?

Do Landlords need to file a tax return?  

The short answer is YES! 

You will need to register with HMRC and file a tax return if you rent out a property, no matter what your circumstances – this includes if you:

- only have one property that you rent out and you barely earn any profit (or even a loss), or

- you have 100 properties and this is your sole income, or

- anywhere in between!

When you start to rent your first property you will need to register with HMRC for self assessment.  This can be done online, and will only take a couple of minutes using this form.  Tick the box for ‘I’m getting income from Land and Property in the UK’, and use the date your first tenant moves in.

Landlords are required to file a self assessment tax return each year.  The return is due by the 31st January following the end of the tax year via the Government Gateway or online software (or 31st October if filing via a paper form).  For ease, the simplest way to set your financial year is the 1st April to 31st March so it more of less coincides with the tax year (when using software you will see the only work on a full month basis).  Your first tax return will cover the period from when you first start renting your property until the 31st March.

If you are also employed, you will also need to include your employment income and you will need your P60 (and P11D for any benefits) from your employer to complete your tax return. These should be given to you by:

  • P60 – by the 31st May following the end of the tax year
  • P11D – by the 6th June following the end of the tax year

Any self employed income, savings/bank interest received, dividends from shares etc will also need to be included, and if you receive Child Benefit and your rental income takes you over the threshold into the higher tax bracket you will also need to declare your Child Benefit.

What Expenses can I offset?

There are a number of expenses you can claim as an expense and offset against your rental income, including:

  • Council tax, insurance, ground rents etc
  • Electricity, gas & water bills
  • Property repairs and maintenance – however large improvements such as extensions etc will not be income tax deductible. They will be added to the cost of the property when it is sold and be deductible against any capital gain (these are known as Capital Expenses)
  • Legal, management and other professional fees such as letting agency fees.
  • Other property expenses including buildings insurance premiums, gas safety certificate, mileage and parking for property checks etc.

Can I claim my mortgage interest as an expense?

From the 17/18 tax year onwards HMRC are phasing in new rules for mortgage interest. Under the new rules mortgage interest will not be included in your expenses, but you will still be able to claim relief of 20% of the interest you pay.

This means that your taxable income will now increase, although if you then remain in the Basic Rate tax bracket you will not actually pay any more tax.  For example (ignoring any other expenses) - currently if your rental income is £15,000 per year, and your mortgage interest was £10,000, then your taxable income would be £5,000 for the year, and you would pay 20% tax on this.

However, under the new rules, your income would be the full £15,000.  This may not sound a problem, however if you have multiple properties, or employment income as well, adding these together could take you over the threshold and into the Higher Rate bracket.  

This increase could also affect claims for Child Benefit and Income Tax Credits.  The only good thing is that the higher rate bracket will have risen to £50,000 before the changes take full effect in 2020.

Here are a couple of examples, so you can see how it will affect you:

Basic Rate Taxpayers

Basic Rate Taxpayers - Landlords


Higher Rate Taxpayers

Higher Rate Taxpayers - Landlords

As you can see, the Basic Rate taxpayers will only be affected if the increased income pushes them into the Higher Rate band, however if you are a Higher Rate taxpayer, the tax you pay will unfortunately increase.

What happens when I sell my property?

When you sell your property you will be liable for Capital Gains Tax on the profit you make.  This is where your capital expenses I mentioned earlier come into play. 

To work out your profit on the sale you deduct the costs from when you bought the property (stamp duty, solicitors fees etc), fees from selling your property (solicitors fees, estate agent fees etc) plus any capital expenses throughout ownership of the property (renovations etc) from the sale price, along with the original cost of your property.  The remaining profit is your Capital Gain.  As an individual you get an annual allowance to offset against this gain (for 18/19 it is £11,700) and you will need to pay tax at a rate of either 18% or 28% on the remaining profit, depending on your income level.

If the property sold was previously your main home then your gain will be reduced, and will be dependant on how long you have rented the property.

The gain will need to be declared on your tax return for the year you sell your property.

It may be worth noting that if you joint own the property with your spouse or another person then the profits will be shared equally and you will both benefit from the annual allowance.  Another point to note is if you have more than one property and intend to sell them both/all, it would be prudent to sell each property in different tax years to minimize your capital gain -  spread it over a number of years and take advantage of the annual allowance rather than one lump sum in one tax year.

Should I set up as a limited company?

Unfortunately, this is not a simple question to answer, and will depend on your circumstances – for example :

how many properties you own and rent out

whether or not you will want access to the cash quickly

how long you plan on owning the property/properties

your other income/personal circumstances

The new mortgage rules for interest mentioned above does not apply to limited companies – you can claim all of the interest from your mortgage as an expense, just like everything else mentioned above.

You are likely to pay less tax as a limited company as they pay corporation tax.  You’d be paying either 40% if a higher rate or 45% if additional rate tax payer, where as corporation tax is currently at 19%, reducing to 17% in 2020. 

However, taking money out of the company will be taxed differently.  As a self employed landlord you will be taxed personally on the whole profit, and therefore the entire profit is then yours.

A limited company is a separate legal entity – and the company is taxed on the profits as mentioned above.  You would need to take money out of the company, which will then also mean a personal tax bill on top of the corporation tax you have already paid.

If this is your sole income then you will be able to draw a salary from the company, which is also then an expense to offset against the rental income for corporation tax.  Depending on the amount of your salary, there may be tax and NI implications, so usually a small salary is recommended, then dividends to be taken on top.  If you have other income (employment/self employment) then dividends would be recommended as a sole way of taking money out of the company.  You are able to take £2000 in dividends each tax year personally tax free, after this you will need to pay personal tax of 7.5% if you are a basic rate tax payer, 32.5% for a higher rate tax payer or 38.1% for an additional rate tax payer.  Also, bear in mind dividends are taken out after the corporation tax has been paid.

Another thing to bear in mind is when you come to sell the property the annual allowance you get as a self employed landlord (mentioned above) is not given to limited companies – therefore you will need to pay corporation tax at the current rate on the whole profit from the sale, and also full dividend rates if you take the money out of the company.

As with any self employment vs limited company debate there is more red tape with a limited company – you have to have a business bank account, the accounts are more formal as need to be filed with Companies House, and therefore accountancy fees are likely to be higher.

As I said at the start – a limited company may not be the way to go, so we would recommend seeking further advise to see if it would suit your personal circumstances.  It is also worth bearing in mind different interest rates and mortgage products available to individuals and companies, and transferring a property you currently own to a limited company could mean additional costs such as stamp duty and a capital gain on transfer.  Now you can see why it is not a simple question to answer!

Is a rental property subject to inheritance tax?

Yes, all properties you own will be classed as part of your estate for inheritance tax, and tax will be due as per a normal property depending on your personal circumstances.  If your rental property takes you over the property thresholds (property values less any outstanding mortgages) you will be taxed at the current inheritance tax rate (for 18/19 it is 40%).

Planning for inheritance tax is a must for anyone who is likely to be over the thresholds and we recommend discussing with an expert to ensure you are able to minimise future tax bills.

The information provided here is generalized.  Please contact us for specific advice relating to you and your personal circumstances.