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a guide to paying tax on a rental property

Published: 16/01/2022

Without beating about the bush, Landlord taxes are complicated.

Below we explain what landlords need to be aware of about the taxes that will affect them, how to pay them and how to ensure they're paying the right amount.

How much tax do landlords pay on rental property?

A Landlord may be liable for taxes, including:

  • Stamp duty
  • Income tax
  • Corporation tax

Furthermore, they may have to pay capital gains tax if the rental property is sold.

The amount of tax payable when letting a property will depend on:

  • Overall annual income
  • The purchase price of the property
  • What deductions and allowances can be made
  • Whether or not the rental income goes through a limited company
  • The profit made when the property is sold

Stamp duty

Stamp duty is nearly always payable when a property is purchased to let in England.

Landlords purchasing a buy-to-let property, or those buying second homes, must pay a 3% stamp duty surcharge.

The stamp duty bands for landlords are:

The portion of purchase price

Buy-to-let stamp duty rate
£0 - £125,000
3%

£125,001 - £250,000
5%

£250,001 - £925,000
8%

£925,001 - £1.5m
13%

£1.5m +
15%

Paying stamp duty

If stamp duty is payable, a Stamp Duty Land Tax return for HMRC must be completed and paid within 14 days of completing the purchase.

Solicitors or conveyancers will generally do this on the Landlords behalf, or they can opt to complete the return and pay the bill themselves.

Income tax and national insurance

If income is earned from renting out a property, a self-assessment tax return and pay income tax needs to be completed.

How much is payable depends on:

  • The income from the rental properties
  • Any other sources of income 
  • Deductions that can be made

Personal allowance and income tax bands

All income taxpayers can deduct a personal allowance from their taxable income, which is set at £12,570 until 2026.

Income tax is then chargeable at the following rates:

Portion of income

Tax rate
£12,750 - £50,270
20% (basic rate)

£50,271 - £150,000
40% (higher rate)

£150,000 +
45% (additional rate)

Landlords can claim a tax-free property allowance if they make less than £1,000 per annum from renting property outside a limited company.

Landlord tax allowances

Certain expenses can be deducted from the overall rental property profit to reduce the income tax bill.

These expenses may include:

  • Business costs i.e. phone calls, travel, and home office
  • Professional fees i.e. legal, accountancy, letting agent and surveyor fees
  • Ground rent if the property is leasehold
  • The cost of any property-related insurance policies
  • Cleaning or gardening service costs
  • Utility bills whilst the property is vacant
Repairs and replacements

If there is the need to repair or replace certain items in the rental property, these costs can be deducted from the income tax bill.

Repairs and replacements might include:

  • Repairing or replacing furniture or furnishings
  • Repairing or replacing appliances or kitchenware

The cost of replacing items can only be claimed up to the value of the old item. For example, if a sofa worth £500 needs to be replaced with one that costs £1,000, only £500 can be claimed.

Class 2 National Insurance

Class 2 national insurance may need to be paid if a landlord:

  • Makes more than £6,475 per year from rental property
  • Lets out property as their main occupation
  • Rents out more than one property

Paying income tax

If a landlord makes an income from renting a property that’s above the tax-free property allowance, they’ll need to complete an annual self-assessment return.

The deadline for self-assessment on the most recently completed tax year (April to April) is January 31 each year.

Capital gains tax

When a buy-to-let property is sold, capital gains tax may need to be paid.

Capital gains tax applies to any difference, or ‘gain,’ between the price paid for the property and the price sold, minus any allowable deductions.

Capital gains tax rates for property

If a landlord pays the basic income tax rate of 20%, they’ll be charged 18% on any capital gain from selling buy-to-let property.

If the landlord pays the higher or additional income tax rate of 40% or 45%, they’ll be charged 28% on any gains from buy-to-let property.

Private residence relief

If a landlord lived in the rental property before it was let to tenants, they might be able to claim private residence relief.

For example, if the rental property was their primary residence for three years before they rented it out, they can claim capital gains tax relief on those three years plus the final nine months it was let.

Private residence relief can be complicated, so we advise to seek advice from a tax advisor.

Allowable deductions

All taxpayers can claim a personal allowance of £12,300 deductible from any capital gains tax bill.
Also, professional fees when selling, plus the cost of any significant improvements made to the property, can be deducted from the capital gains tax bill.

Paying capital gains tax

Capital gains tax returns and payment must be completed within 30 days of completing the sale of the rental property.

Corporation tax

Choose to incorporate a limited company to run the rental property business. Landlords have to pay corporation tax on their profits rather than income tax or capital gains tax.

Corporation tax is charged at 19% but will rise to 25% in 2023.

Paying corporation tax

Corporation tax bills and returns are due annually, nine months after the end of the previous trading year.

If the trading year ends in September, the return needs to be filed and bill paid by June of the following year.

Deductions and allowances

Corporation tax is due on all profits, although certain business-related expenses can be deducted from your operating profit before tax is calculated.

Self-assessment

If money is extracted from the business, either as income or through paying a shareholder dividend, an annual self-assessment tax return will need to be completed.

Tax on dividends is calculated differently from standard income. However, the amount of tax paid on dividends will depend on which income tax band the overall income puts one in to.

New landlord tax rules

Before April 2017, 100% of the buy-to-let mortgage interest costs could be deducted from the income tax bill.

However, that has now been phased out, and instead of the full deductions, a standard 20% tax credit on those payments can be received.

Who is responsible for council tax – landlord or tenant?

In most cases, the tenant pays council tax at a rental property.

However, suppose the property being let is a House in Multiple Occupation (HMO), where tenants rent rooms individually, the landlord may be responsible for paying the council in some cases.

If you would like further advice call us today on 020 3137 7877.




Disclaimer:  This article is for guidance only. We always recommend getting professional tax advice.
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