As accidental landlords there is a higher risk of getting into trouble with the tax man over undeclared income.
Accidental landlord aren’t generally looking to make large profits that see them quitting their day jobs, though that would be nice, right? More often we are people who couldn’t sell our properties, at least at the right price, and so have had to keep hold of them and become landlords (accidentally).
If you are in this position it is important to note that you must declare all of your rental income to HMRC, even if you are actually losing money from your investment.
As the tax man begins to crack down on those who abstain from disclosing their additional income now is a good time to learn about paying tax on rental income.
- If you don’t already submit an annual tax return then you will have to register for self assessment. This can be done on the HMRC website. You must register by the 5th October of the year you begin earning additional income and if you miss the deadline you may be slapped with a penalty charge. It’s a pretty rubbish service that is difficult to understand and so expect to make a few phone calls to HMRC before you get your head around it. On the bright side the staff are always really helpful and calls tend to be answered quickly.If you already submit annual tax returns you will just need to complete an additional page regarding property income.
- Be aware of the return deadline. It is usually early October for paper returns and early January for online assessment.
- If your rental income is less than £2,500 you may not have to register. Instead you have to call the HMRC helpline to declare the figure and whilst they will make a note of it, you are unlikely to be charged tax on the sum. The helpline number is 0300 200 3310.
- You only need to pay tax on the profit you make. This is the rent you receive less all reasonable costs you incur to rent the property. Examples of such costs are; letting agent fees, utility bills, ground rent, council tax, lease renewal, accountants fees, insurance, repairs and maintenance (though not improvements) and interest on your mortgage.
- If you rent your property furnished you can claim an additional discount of 10% of the net rental income (rent-expenses) to cover wear and tear of said furniture.
- If you are making a profit it is wise to put some money aside to pay your tax bill as late payments result in penalty fees. You can roughly calculate your tax bill by applying your tax rate to your amount of profit. The tax rate you pay will be the same that you are charged at your day job. This is ordinarily 20% however if you are a higher rate payer (you earn over £34,000) you will be charged between 40 and 45% on your income. You can find out your tax code by asking your HR department, checking your payslip or calling HMRC.
- If you make a financial loss (your expenses are more than your total rent charged for the year) then you must still declare this. If you make a profit next year you can deduct the loss you made this year to bring down next years tax bill.
- Always keep the invoice/receipts of any of the expenses you are deducting in case your account is audited at a later date.
- If you sell the property you will likely be liable to pay capital gains tax. How are people supposed to make money!? Your solicitor should be able to advise you of this at point of sale but do keep it in mind because, you guessed it, a penalty will apply if you don’t declare any profit made from the sale.
Though it is a pain to have to go through the motion of self assessment, especially when you are making a pittance, it is really important that you do get all your ducks in a row from the beginning.
We keep a spreadsheet with all our income and outgoings on it and when tax return time comes around all we need to do it fill out a couple of forms and we’re done.
Then you can sit back, relax and wait for the bill to arrive GROAN!
Have you had any run ins with HMRC regarding your rental income? Let us know in the comments below.