Landlords receive rental income from renting out properties in the UK. The landlord has to pay income tax on the profit from the rental income.
This affects both residents and non-residents of the UK.
What to do if you start receiving Rental Income from a UK property.
The first step is to disclose this to HMRC by contacting them by phone or online.
If your profit is more than £2,500 to £9,999 after allowable expenses or £10,000 or more before allowable expenses, you would have to report your rental income on your self-assessment return.
You can register for self-assessment online, or over the phone with HMRC.
When to Inform HMRC about your Rental Income.
You would have to inform HMRC of your property rental income by 5th of October after the tax year.
For example, let say a taxpayer start to rent out a property by the 1st of Dec 2017. This is within tax year 2018/19. They would have to inform HMRC by 5th of October 2018.
They would also have to submit their tax return by 31st of October after tax year if submitting paper returns. If submitting their return online, they would have to submit by or 31st of January after the tax year.
Computation for rental profit from Rental Income.
To calculate rental profit, The actual rent received is deducted from allowable expenses of the Profit on rental income.
Expenses that could be claimed when calculating rental income
This would vary depending on the landlord’s expenses,e.g:
- General maintenance and repairs to the
- Water rates, council tax, gas, and electricity
- Insurance, such as landlords’ policies for buildings, contents and public liability
- Costs of services, including the wages of gardeners and cleaners
- Letting agent fees and management fees
- Legal fees for lets of a year or less, or for renewing a lease for less than 50 years
- Accountant’s fees
- Rents (if you’re sub-letting), ground rents and service charges
- Direct costs such as phone calls, stationery and advertising for new tenants
- Vehicle running costs (only the proportion used for your rental business)
Expenses that you could not claim from rental income
- Mortgage payments: Only Interest element of the mortgage payment can be deducted as an expense.HMRC has introduced a new change to the amount of mortgage interest that could be deducted from rental income.
From tax year 2017/18, HMRC is planning to gradually remove the relief for mortgage interest. For example:
- 2017/18 -only deduct 75% of mortgage interest could be deducted.
- 2018/19 -reduced to 50%.
- 2019/20- reduced to 25%.
- By 2020, Landlords would not be able to claim relief for mortgage interest.
Capital expenditure is usually expenses that would be used in the business for a longer period. For example adding something to the property, altering or upgrading part of the house and also purchasing furnishing and equipment for the property.
3. Clothing – Expenses that have dual benefits are usually not allowable expenses by HMRC.
Clothing is an example of such an expense. Cost of buying, for example, a suit to wear to a meeting relating to your property rental business, you can’t claim for the cost as wearing the suit is partly for your rental business and partly to keep you warm – no identifiable part is for your property rental business.
4. Private telephone calls – Telephone expenses have to relate only to property rental business.
Some maintenance and repairs expenses that could not be claimed against Rental income.
Cost of maintenance and repairs to a property are usually allowable expenses deductible when computing the rental profit. However, maintenance and repairs that are of capital nature are not an allowable deduction.
Repair and maintenance would have capital nature it doesn’t restore an asset to its original condition, sometimes by replacing parts of it.
The exception to this is replacing a part of a property with the nearest Morden equivalent such as replacing single glazed with double glazed window.
The expenses would be added to the cost of the house and relief would be received from capital gains when the property is finally sold.
Tax payable on Rental Income.
The tax to be paid would how much profit you make
- Personal circumstances of
- Your profit is the amount left once you’ve added together your rental income and taken away the expenses or allowances that you can claim.
What happens if you receive rental profit without declaring to HMRC?
Surprisingly a lot of landlords are not aware of the compliance issues that relate to receiving rental income.
So, therefore, they have not declared this to HMRC after several years of receiving rental income.
HMRC, therefore, has opened a window which would give taxpayers not paying tax on their rental profit to make a declaration through the let property campaign.
This campaign is just for a short period and HMRC hopes this would give landlord in the UK who owe tax through letting residential properties in the UK or Abroad to get their tax up to date in a simple way.
The exception to the let property campaign for Rental Income.
The let property campaign is only open to residential properties. It’s not open to Landlord letting out non-residential properties like shop, garage, and lockups.
It’s not available to declare rental income from a Limited company or a trust.
Advantages of declaring Rental income through The Let property campaign.
When a taxpayer makes a full and voluntary disclosure of all unpaid liabilities, within this window open by HMRC they can expect a lower penalty than HMRC.
If the HMRC, finds out about this rental income themselves, they would otherwise raise an inquiry or compliance check without the disclosure.
Steps in Benefiting from The let property campaign.
- Firstly, The taxpayer would notify HMRC about their intention of taking part in the let property campaign.
- Secondly, They would inform them about the all income, gains, tax, and duties you’ve not previously told them about by submitting a disclosure.
- Thirdly, Help HMRC as much as you can if they ask you for more information.
- Fourthly, HMRC would give the taxpayer 90days after informing them of the disclosure to make disclosure
- Lastly, They would write a make a formal offer to explain their circumstance.
Conclusion on Rental income in the UK.
A landlord can make payment plans with HMRC on the amount outstanding rather than ignoring the window opened for disclosure.
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