Tax Liabilities
Tax on residential lettings
Letting residential investment property is treated as running a business – even if you only let out one property. And if you let out more than one property in the UK, they’ll all be treated as a single business.
Whether you let one or several properties, you’re taxed on the overall ‘net profit’. You work this out by:
adding together all your rental income
adding together all your allowable expenses
taking the allowable expenses away from the income
Working out your net profit like this means that you can offset a loss from one property against the profit from others. Your net profit counts as part of your overall taxable income.
The ‘Rent a Room’ scheme
If you are letting furnished accommodation in your own home to a lodger and your total receipts (rent plus income from meals, laundry service, etc) are £4,250 or below (£2,125 if letting jointly), you can get this income tax-free under the ‘Rent a Room’ scheme.
You’ll have to pay tax on anything over £4,250. Or you can choose not to use the scheme if you’d prefer to pay tax under the rules for residential lettings.
If you let your home while you live somewhere else, your profits from the rent are worked out and taxed in the same way as for residential investment lettings.
The same rules apply if you let part of your home outside the ‘Rent a Room’ scheme. If you let part of your home this way, you can include a percentage of household costs like gas and electricity when you work out your allowable expenses.
If you let out property, you’ll have to keep records of your income and expenses for at least six years – whatever type of letting it is. HM Revenue & Customs can ask to see supporting information for your figures at any point during this time.
Even though you can’t claim expenses when you use the Rent a Room scheme, it may still be worth keeping proper records. You’ll need them if you decide to opt out of the scheme later.
Record keeping for landlords
If your total income from UK property is £15,000 or more in a tax year you must declare it on the full Self Assessment tax return. If it’s under £15,000 you may be able to complete a shorter four-page return. If your taxable income from property is under £2,500 your Tax Office may be able to collect any tax you owe through PAYE (Pay As You Earn) if you already pay tax this way.
Declaring and paying tax on your rental income
We would always recommend engaging the services of proper qualified Tax Specialist who will be able to assess your tax liability according to your personal circumstances.