If you're earning an income from renting property, make sure you’re aware of your tax liabilities. Here's an overview of what you need to know.

If you’re a landlord who receives rent from a property, this is considered an income for tax purposes. 

It’s important that you understand the tax implications of bricks and mortar investments, to avoid falling foul of HMRC.

Here’s a round-up.

Income tax

The rental income you receive will be added to any other income for tax purposes, such as employment income or savings. 

You’ll need to declare rental income on a self-assessment tax return each year, but you'll typically be given certain allowances which reduce the amount you shell out to the taxman. 

For starters, you have a personal allowance, which is the amount you can earn, and includes rental income, before being subject to tax.

This stands at £12,500 for the 2020/21 tax year. The personal allowance changes if your income is more than £100,000.

After that’s taken into consideration, any rent you receive will be taxed at your personal tax band.

Beware that chunks of rental income could potentially push you into a higher band, seeing you pay more tax than you expected. 

It’s also worth checking to see if you’re eligible for a property allowance, which means that the first £1,000 of your rental income is tax-free.

Landlord allowances 

You used to able to claim tax relief on mortgage interest as a landlord. But in recent years, a reduction in the value of this has been phased in.

Since April 2020, you cannot deduct any of your mortgage payments from your rental income when calculating your tax bill. Instead, your rental income will be taxed and you’ll get a 20% tax credit for your mortgage interest.

The 10% so-called wear and tear allowance was scrapped in April 2016. However, there are other costs you can claim to reduce your tax bill. These include things associated with running the property, such as insurance, council tax and utility bills. 

You may also be able to claim tax relief for replacing domestic items, such as beds, sofas and carpet.

If you’re renting out a leasehold property, you can offset service charges, and ground rent too.  

Stamp duty

You may face paying eye-watering sums for stamp duty since the introduction of the 3% loading on ‘additional homes’, which includes buy-to-let properties. 

This stamp duty band was introduced on 1 April 2016, and it’s charged on the entire property price. 

The Chancellor recently introduced a stamp duty holiday. However, the 3% surcharge applies on top of the new tax rates, so you’ll still face a bill on the first £500,000 of property.

Capital gains tax

If you’re selling a property that isn’t your main home, you may be subject to capital gains tax (CGT) on any profits – or, in other words, the rise in value over the time you’ve owned it. 

Everyone has a CGT allowance, which is the amount of profit you can make on investments before being subject to this tax. This stands at £12,300 for the tax year 2020/2021.

CGT is payable at 18% (if you’re a basic-rate taxpayer) or 28% (if you’re a higher-rate taxpayer) thereafter. 

You may be able to reduce the amount of CGT you pay for major capital expenses you’ve forked out for during the period of ownership. Make sure to retain proof of any large costs.

You might also be able to offset stamp duty costs you originally paid when buying the property against your CGT bill.

While returns from buy-to-let can be enticing, make sure to do your sums first – tax can take a big chunk out of profits.

If you’re unsure of your tax liabilities, make sure to seek professional advice. An accountant should be able to clarify what your liabilities are, when these should be paid, and any allowances that may be available to you to reduce your bill.

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