Tax on Rental Income
If you let out all or part of a property (including your home), how you’re taxed on the rent depends on the type of letting.
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.
Letting all or part of your home
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.
Tax on rent from residential property lettings
Letting residential property is treated as a single business, even if you let out more than one property. If you let out several properties, you can offset losses from one against profits from another. You pay tax on any profit as part of your overall income.
What counts as residential lettings?
Properties that you let out for people to live in as their home count as ‘residential lettings’. For tax purposes these are treated differently from furnished holiday lettings.
If you rent out part of your own home this can also count as residential lettings, but you can take advantage of the ‘Rent a Room’ scheme instead.
This lets you get tax-free income of up to £4,250 from letting rooms in your home.
Working out your taxable profits from residential lettings
You work out your ‘net profit’ as follows:
- add up all your rental income
- add up all your ‘allowable expenses’
- take your allowable expenses away from your income
If you have more than one residential letting, you group all the income and all the expense figures together.
To arrive at your taxable profit deduct any allowances you’re entitled to from you net profit:
If you let furnished property, you can deduct either of:
- a ‘wear and tear’ allowance – based on a percentage of your rent
- a ‘renewals’ allowance – the cost of replacing old items with a new equivalent (but you deduct any money you get from selling the old item)
You may also be able to deduct certain ‘capital’ allowances for the cost of equipment relating more generally to your lettings business – check the detail in our related article.
How much tax will you pay?
Your taxable profit from property letting is added to your overall income. If this is more than your tax allowances you’ll pay tax on it at your normal Income Tax rates.
If you let property jointly
If you let property with someone else, when you fill in your tax returns, or forms P810, you should each show your share of:
- the income and expenses
- the profit (or loss)
Paperwork that you need to keep
You’ll have to keep records of your property letting business for six years after the tax year they’re for. You need them to back up the figures you put on your tax return. Your records should include details of:
- all the rent you receive and the dates when you let out the property
- any income from services provided to tenants
- your business expenses
- rent books, receipts, invoices and bank statements
Record keeping for landlords
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 you let out residential property you will have to keep records of rent received and your expenses to work out the profit you’ll pay tax on. You work out your taxable profit by taking your expenses and certain allowances away from your rental income.
What financial records do you need to keep?
You’ll need to keep the same sorts of records whatever type of property letting business you have – residential or holiday letting, in the UK or overseas. They should include details of your:
- rental income
- allowable expenses
- ‘capital’ costs
To back up your records keep rent books, receipts, invoices and bank statements.
You’ll need to keep a note of:
- the rent you charge and receive
- any services charged separately – for example meals, laundry service, etc
- the dates you rent out each property
Your records should include details of all your costs of letting or managing your property. Allowable expenses reduce your taxable profit. They include all or part of these costs:
- letting agent’s, accountant’s and legal fees
- buildings and contents insurance – only part if you just let part of the property
- property loan interest
- maintenance and repairs – not improvements
- utility bills, like gas, water, electricity
- rent, ground rent and service charges
- Council Tax
- other direct costs of letting the property, like phone calls
Make sure that you can separate your business from your personal expenses.
You can reduce your taxable profit by claiming different types of allowances for the cost of furniture and equipment you provide with the property.
You may also be able to deduct certain ‘capital’ allowances for the cost of equipment relating more generally to your lettings business.
You’ll need to log how much all of these things cost and when you bought them.
To back up your records keep rent books, receipts, invoices and bank statements. Also make sure that you can separate your business from your personal expenses.