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Property rent is also subject to income tax as the money earned from any other real estate properties. The owner often pays more rental income tax than is actually required, usually due to lack of knowledge about deductions. Real estate Investments come with deductions which can minimise tax on rental income by balancing profits and losses. After calculating the total income for the year from rental properties, one should calculate all the expense on operating the rental properties.
For those particularly interested in further reducing their tax liabilities, consulting an Inheritance Tax Specialist might provide additional insights into estate planning and tax reduction strategies.
During tax liability calculation, rental property holder should minimise the rental profits from property by deducting owning costs, repairs and maintenance expenditure records, letting agents fees, and anything spent on behalf of keeping the letting process. Keeping profits and losses in view, there is quite a need for the landlords to know the tips on how to reduce paying tax on rental income. After reading this article, landlords will be able to know how tax calculator on rental profits is used as well as which and how much tax to pay.
Your rental income will be deducted from other costs you pass on to your tenant—for example, cleaning and maintenance deductible expenses for communal areas and any property finance costs included in the rent. You also need to have any portion of your tenant’s security deposit, which you retain at the end of the tenancy.
“You can deduct rental expenses or finance costs as allowable expenses.”
Landlords with more than one property can add together the money they receive from all their properties and apply costs deduction allowances. This means that you are allowed to offset allowable expenses from a single property against rental profits from another.
Recent Tax Changes for Landlords
Previously, landlords could claim for the interest element of their mortgage. This was a valuable benefit to landlords who are a higher rate taxpayer. New rules, which have been phased in and were fully operational from April 2020, mean you can no longer make this claim for mortgage payments. Instead, you will receive income tax rate credit based on 20% of your repayment mortgage.
Here is a few guidance gathered by Legend Financial to help you minimise your rental income tax.
Claiming All Deductible Expenses
Claiming All Deductible Expenses
You can diminish your rental income tax liability by guaranteeing a part of the costs which accompany a lease property. Passable costs are the everyday expense of dealing with your occupancy. They include:
- Landlord insurance – buildings, contents, and public responsibilities
- Letting agent fees and management fees
- Ground rent and service taxes
- Cleaning, furnishings, and gardening services fees, which you pay cleaners and gardeners for
- Accountants and legal fees
- The cost of rent a room video advertising or other forms of marketing
- Stationery and telephone calls used directly for your property business.
When it comes to ensuring a reasonable letting price, you must determine how much space your business requires. Calculate your monthly finance costs for the rental expenses you want to claim, then divide that amount by the percentage of the room used for business (which should usually be one room). For example, if you have a house with seven rooms, an office should occupy one of them, so the rent is based on 1/7th of the allowable expenses. If your office was open seven hours a day on average, you would calculate 7/24th of the total income for the year and include it as rental profits in the record agreement.
Creating Joint Ownership
A person can buy rental property with fellow investors when it seems difficult to afford a property single-handed and also to reduce rental income tax, such as a rent a room hotel. While investing with another person or as couples, the other should know the rental tax records of joint ownership. Rental income tax on any of the partnership member is calculated by summing up all the profit record.
It is important to know that the refundable security deposit paid by the tenants is not added to the taxable rental income as the deposits shall be returned to the tenant. Its only purpose is security, and if any water wear and tear is caused by the tenant to the hotel or property, the deposits amount is for repairs use. Joint ownership can be created with either a spouse or some other investor (fellow or businessman).
Many people assume that when a property is jointly owned, any rental income would have to be distributed according to their ownership of the property or land. For instance, where a rental property is owned 50:50, then the natural assumption is that the rent is distributed in the same proportion. However, there are circumstances where the rent can be shared out in varying proportions with tax advantages to each party.
Form a Limited Company
Individually buying a property or land and owning it results in more property income and hence more taxable income. It is often better to establish a limited trade for the rental properties. This way, owners will only have to pay tax for the corporation and not individual tax rates.
As the property or land now belongs to that limited business, the owner can also pay himself salary from the trade. The property or land belongs to the business so rent payments will also be made differently. Although it is very time consuming, it offers some tax benefits for the limited business.
However, pros and cons should be weighed, and option of a limited business should be chosen if owner tax bracket is high and future plans are also dependent on investment in real estate sector.
“Transfer of property through a limited company will cost less transfer charges.”
A taxpayer will not be required to pay tax on stamp duty, inheritance obligations, or other tax liability. In addition to that, there is limited liability with use of limited business. As there are benefits, there may be some problems as well, like landlords will have to be more responsible. Moreover, the cost of switching trade will have to be paid, and the terms are that if profits are taken out of the business, the rental income tax will have to be paid as per the existing laws.
Reducing Through Extension
Investing in your existing properties will help you avoid hefty stamp taxes whilst also increasing the value of your portfolio. Because of recent share of changes in development rights in England and Wales, you can now extend your existing property further than you could previously, increasing your monthly rental income.
Real gains can be made by growing or expanding your property, provided you consider the ceiling price of the area in which your rental is located. However, keep in mind that if you are making any significant improvement that may increase occupancy, you may be under restriction with the upcoming updates to the HMO rules.
Short-Term Tenants
There are ways to reduce your landlord tax bill if you are between tenants. Council tax and utilities can all be claimed as income and expenses during this window of time, but wouldn’t you instead be earning money than saving? It is sometimes worthwhile to consider taking on a relatively short let during a void window of time in order to generate some property income.
“Owner has the property for rent and he has the option to rent it on a short or long-term depending on his choice and need.”
A long term is normally referred to as 12 months or more. Resident on a long term basis has their own cons. For example, the owner cannot raise their rent as their demand is often a fixed rent basis for the whole duration of occupancy. They may not fix the problems in repairs and maintenance well before time unless there are critical repairs needed. This all results in huge capital expenditure and profit loss to the owner. Keeping in view the occupant’s rights, the owner cannot terminate the record agreement until the duration is not completed. Frequent repairs and other cons can be addressed by having occupants on a short term basis.
Though long term occupants offer a very predictable property income and ease of management, it is still better to have short term clients. A short term may be on a daily, weekly, or monthly basis. The owner can fix the rent rates as per the market whenever he wishes to do so. A short-term rental can generate 2-4 times more profit as compared with long term rental businesses. Secondly, maintenance is quite easy and can be done well with a great window of time.
Landlords and owners must have the guidance to cater to circumstances like this. If there is no occupant, for example, then capital expenses of utility bills, miscellaneous taxes, maintenance costs should be claimed or deducted. Once the tenant leaves the property, proper procedure should be followed to carry out required maintenance, and record paperwork should be completed as per requirements. Whilst big institutions have policies to do this type of task, small landlords should focus on best work within the rules.
Utilising All Available Tax-Bands
Owners pay tax on rental properties as per tax bands defined for rental income tax. These bands may change every year as per the government. The tax bands for property income are the same as other income tax bands—basic rate, higher rate, and additional rate.
At the end of the tax year, they must calculate to which band they belong. After calculating and deducting all the income and expenses using the tax calculator, they may be able to accurately determine the corresponding band the rental income belongs to, each of which decides the tax liability percentage of the taxable rental income. A basic rate taxpayer pays 20% tax rate, higher rate tax at 40%, and additional tax rate is at 45%.
If the owner receives rental income from any other source along with the rental property, the bands tax calculator works by adding all the earnings (e.g., dividend income, pension income, business income, employment wages, shares, and anything earned). Losses on income and expenses record should be calculated accurately with a tax calculator so that the lowest possible tax band is used for tax. Especially if the owner’s gross profits are less than the basic rate of tax band, there will be 0% tax. Any small mistake can cause excess tax dues, so the tax rate has to be worked out with an accountant using a tax calculator.
Another example is transferring property to a spouse, if the other’s income tax bracket is less than the other. Transfer of property will work from both sides. Firstly, it will lower tax as soon as it gets transfer on spouse name. Secondly, it will lower the tax on the property which is still in the spouse’s name by lowering the tax band for you.
Utilise Mortgage Interest by Changing to an Offset Buy to Let Mortgage
Deduction of interest on mortgages permits the buy to let landlord to reduce the income tax on rent payments by an amount equal to the total mortgage payments over the same tax year. Loans from banks to use for rental property furnishings or condition upgrade are allowed for such deductions.
Sadly, such deductions from rental income are not permissible for financing and can only be utilised for corporate tax calculator deductions by filling in a tax return at the end of the tax year. This permit minimises rental income tax.
There is still a way to reduce mortgage payment. For example, a buy to let landlord bought a rental property for which the yearly interest is £10,000, and the rental income for the same tax year from that property is £40,000. So, when filling out the tax return, a buy to let landlord can deduct this £10,000 interest from the annual rental income. Using a tax calculator, this would make the total income for the year equivalent to £30,000. Lenders should hand over the records containing the interest paid for each year.
You can reduce the loan interest by changing to an offset buy to let mortgage. Although it has limited availability, it could help you keep property invested into your offset mortgage loan. Less mortgage interest paid shows a higher annual ROI (return on investment) in the tax calculator, offsetting against the additional rate tax to pay on your rental income.
Planning Your Payments
Taxpayers need to know all the relevant dates for self assessment, including when to complete a tax return, self assessment year, when to pay tax to HMRC, and when to notify HMRC if you were not able to pay tax for tax planning purposes.
he most efficient way to reduce the expenses is getting your rental income tax return before the tax return deadline, not after the end of the tax year by 6 April. Specifically, the self assessment tax return year window time for individuals on self employment runs from 5 April to 6 April.
HMRC may impose a penalty for late filing, so it is important to complete a tax return for the income tax, including capital gains tax (CGT) and National Insurance contributions, before 6 April. Early filing also gives enough window of time in case of any misunderstanding and rough calculation as well as get any tax refund earlier. Whenever possible, owners need to fill in their self assessment records well before the deadline along with any carried forward loss on rental profit to avoid any penalties.
On the other hand, individuals who filed self assessment tax return page online need to pay tax due on their taxable rental income, capital gains tax (CGT), pension purposes, other property profits, and employment wages by 31 January after the end of the tax year. Those who filed self assessment tax return on paper can pay tax up until 31 October. HMRC may give this allowance of time for paper returns but they, however, continue to impose the deadline to pay tax on self assessment by 31 January.
As not all taxable rental income tax and CGT are received and computed in the tax calculator before the self assessment tax return deadline, not all need to pay according to the dates above. HMRC dedicates 5 October following the end of the tax year for taxpayers to notify HMRC that they were not able to pay capital gains tax and rental income tax on their previous self assessment tax return.
By this time allowance, they need to register for self employment tax scheme with HMRC for income tax purposes and keep all receipts, records, video, and any rental-relevant information, whether they are on an accrual or cash basis accounting.
Whatever property income you earn, set aside a fraction of the rental profits you make in a savings account. You may be able to earn profits from your savings and pay tax with it. Besides, it would help if you always met the property tax deadline.
Maximising Property Income Allowance
Rental income profits have a tax free threshold in which taxpayers are not liable to any tax, the property allowance set on all kinds of income. For the tax year 2023/24, the tax free threshold or property income allowance is set at £12,570, the current tax free property allowance. Any amount above the property allowance will belong to any tax bands.
Owners should use a tax calculator or work out their property allowance with their accountants as property allowance may differ depending on several factors. Disclaimer: Visit the UK government page for more information about the different kinds of allowances that may apply in your case.
Carrying Forward Losses
The owner of a residential property rental business can deduct through a tax calculator and mention all the expenses on tax return annually. However, this may not be always the case and current tax year’s expenses may not always come on same year’s tax return. Unless expenses of transportation, repairs and maintenance services, depreciation, letting agents fees, legal fees, and other taxes are not computed in tax calculator.
It is advised that expenses be carried forward for next year’s tax return, especially when the owner deals with loss in the rental business. If the owner is operating more than one UK property rental business, he should calculate loss and gains from all the properties and if the tax calculator shows a loss total, it must be carried forward.
“As landlord, owner has the right to report losses and carry them forward”
The criterion is that landlords must own at least 10 percent of rental property and should make executive judgments. Laws lower the write off if the owner has modified total revenue accurately using a tax calculator.
What happens if the owner fails to mention all the losses? The owner should carry forward all the losses again whatever he has failed to mention on tax return page. If landlords rent a room or house that qualifies as furnished holiday lets, which they only use during a vacation or holiday and put-up furnished holiday let for letting for another months, he could not claim the expenses for the said duration.
If the owner only earns rental income from holiday lettings for 6 months in a tax year, he will only be eligible for reporting and claiming losses and expenses for the holiday let on those 6 months of rental business period.
Claiming Private Residence Relief
Private resident relief scheme is permissible for only or main residence for an individual. The owner can claim it for the main residence once he sells his property. There should not be any business activity on the property for which letting relief is to be claimed.
However, private residence relief can be claimed for the shared property where the landlord and the tenant share the same residence. Such cases are very few, and the owner can take benefit out of it. Once the landlord sells out the residential property, he is eligible to claim residence relief.
Claiming “Home Office” Allowable Expenses
For rental UK property, landlords can share a part of a home such as a room as an office section in a legitimate way. Consequently, the owner can deduct an amount equal to the finance costs of running an office for rental activity once filling out rental income tax return. There is always a share of allowances for running an office for rental businesses operations. An office serves as the front desk, where they deal with and share information with clients. Rental profits and the rest of their transactions are done at the same very place.
“If the owner’s job is related to the field work, then the office section will be utilised for administration purposes.”
Once home office is established and declared, transportation expenditure is considered allowable expenses. If the office is far from the landlord’s residence, the transport charges for conveyance to that office may be considered as personal trips and will not be included in cash basis records as allowable expenses allowances, which is not the case for home-based offices.
Let’s now discuss all rental expenses that can be deducted for running a home office. There are two main types of home office deductions—direct and indirect.
Apportionment
Apportionment allowances refers to the distribution of losses and expenses between the owner and the tenant. Apportionment can be used as a tool for reducing the tax burden on the owner. Expenses are borne by the owner and balanced taxes are also paid by him. Just like apportionment in insurance where losses are divided on calculator by a percentage amongst the businesses and client through an agreement, it can be done in rental properties as well.
The owner can make a deal with the tenant by which both will be liable to pay tax for a part of their expense. Expenses may include maintenance and repairs, etc. Apportionment allowances will help the owner get more profit especially for short term tenant and will also result in lowering the taxes.
Claim Replacement of Domestic Items Relief
Landlords can get benefit from Replacement Domestic Items Relief. Items replaced in a rental property result in lowering the tax by deducting the amount spent in replacement. On the other hand, a good set of items for tenants’ use will result in raised rental payments. Hence, profits will ultimately rise.
To be eligible for domestic items relief scheme, the following criteria must be met:
- Rental house can be empty, partly empty or full, and finance costs should be sustained on buying an item for replacement
- Item purchased should be available for the use of tenant and the replaced item must not be used again.
This type of relief is given against the rental income tax for asset cost for replacement and less costs for ay item for improvement. Admissible relief is for purchase items that may be:
- Moveable things such as floor mats, screen sheets, carpets, beds, furniture, box, etc.
- Domestic machines such as AC, deep freezers, gas and electricity system, gas and electricity appliances, etc.
- Asset items for kitchen use
- Electronic equipment such as TV
- Fittings, windows, etc.
Anyone whose total rental income is more than £10,000 before expenses, or £2,500 after expenses, will need to fill their tax return. If your rental income is less than £2,500 you should contact HMRC, as they may collect your property income through PAYE. Each tax year runs from 6 April until 5 April the following tax year.
If your rental income tax affairs are complex – you have more than one property, additional sources of income, you are considering letting out property through a limited business – or you don’t feel confident filing your return, you could benefit from having an accountant as a guide. As an expert, your accountant will guide you about all the taxation system and taxable rental income, which kind of expense you can claim, and which rental receipts and expenses you need to keep records for, use tax calculator for accuracy, and provide all crucial information. If you choose an accountant, look for someone with rental income tax experience.
Over and over again, landowners lose cash when they sell an investment property just on the grounds that they don’t make the most of the accessible assessment alleviation on proposition to them.
“Right now, the tax-exempt figure remains at £11,300, which is a very decent saving in anybody’s book.”
Normally, the most effective way to save tax on rental income as a property manager is to utilise both a splendid bookkeeper and a solid assessment consultant or the accountant who can help use tax calculator accurately and provide you with useful information throughout. This article is expected to to provide water-down guide on reducing tax bill, yet it isn’t planned to be substantial exhortation. Hope we have been a source of ease for your tax savings. If you need any help regarding avoiding tax on your rental profits, feel free to reach Legend Financial today.
6 responses
Hi,
I am a UK resident and also a Seafarer. As a result I don’t pay income tax. I would like to purchase a 2nd buy to let property. Will any rental income be tax free up to the £12,750 threshold?
I am not sure If I’m better off setting up a limited company?
Thanks
Gordon
Hi Gordon, thank you for your comments here.
The advice you are looking for appears to be of a specialist area due to you being a Seafarer, however the Rental income will be subject to taxes and the allowance of £12,750 will be available to offset against other income. You can setup a company but it would be best to understand your needs and future planning, before we can advice on it.
If you think this is something to be discussed, please email us on hello@legendfinancial.co.uk and we can then have one of our advisor to be in touch with you.
Many thanks,
Fahad
Hi,
Thanks for the useful information. I’ve just got confused with the below part of the article. As far as I know, as a landlord, we are no longer claim the mortgage interest.
Could you please clarify this bit?
There is still a way by which, one can take away mortgage interest. Let’s say, an owner bought a rental property for which the yearly interest is £10,000, and the income for the same year from that property is £40,000. So, when filling out the tax return one can deduct this £10,000 interest from annual rental income, which makes total income equal to £30,000. Lenders should handover the documents containing the interest paid for each year.
Hello Ilter,
Thank you for your comments. You are quiet right that the mortgage interest no longer can be claimed as an expenses, but infact given a tax relief at the basic rate or the higher depending on your income.
In your question, the expenses of £10,000 can not be claimed as an expenses, rather than as a relief against the tax payable at 20%, so a relief of £2,000 against the taxes due – however there may be some restriction depending on other factors on in the tax return.
We can assist with this if you require help. If you can kindly drop us an email on hello@legendfinancial.co.uk with your contact details – one of our Tax Advisors will then book a call with yourself, as needed.
Many thanks,
Fahad
Hello. My partner has decided to rent out his main home on air bnb. He can move in with me but retain it as his residence. We already own a fhb which is running at a loss. He is a higher tax payer and I am a lower. What is the most effective way to deal with income from his air bnb?
Dear Jane,
Thank you for your comments.
From this we see that your partner’s residence is being looked at to be utilised as a flexible air bnb let under his sole name. Due to his income, there is a potential 40% tax on profits but if we can arrange a call we can look to see if the split can be arranged on the property in various ways to minimise this liability.
With respect to the fhb, is it jointly owned – The losses here can only be utilised against future profits, but we could discuss further possibilities too.
I suggest that if you wish to have this discussed in detail, please drop us an email on hello@legendfinancial.co.uk with your contact information and availability, and one of our advisors will be in touch with you soon.
Many thanks
Fahad