Welcome to our new three part feature from RITA4Rent, dedicated to helping new landlords understand their tax obligations. This first part explores the basics of self assessment, and explains who needs to pay tax.
Have you just purchased or inherited a property you intend to let to tenants? Or maybe you've moved into your partner's home, and have decided to let rather than sell your own house.
In the UK, hundreds of thousands of landlords are being targeted by HM Revenue and Customs (HMRC) via their Let Property Campaign. This operation not only serves the purpose of recouping tax owed by landlords who have not been reporting their rental profits, but also emphasises the very real need for tax education for landlords.
If you receive rental income, you must consider and understand your personal tax position, and determine the right approach as to how, if, and when this should be reported. Most landlords and property investors will need to complete and submit a self assessment tax return.
What exactly is a self assessment tax return?
It is a form which is completed and then submitted to HMRC, either in paper format or online (via the HMRC website or software. Your tax return reports your taxable income so as to determine whether you have paid enough tax throughout the year. It will also determine if you have paid too much and whether a refund is owed to you.
Because property income is treated as an investment for tax purposes, reporting rental profits on your tax return does not depend on you being self-employed. If you did decide to venture into property trading (buying, refurbishing and selling), this would be treated differently again.
There is a common misconception we encounter amongst the landlords we have dealt with under HMRC’s Let Property Campaign. They tell us that as they pay tax via their employment income each month, they believe their rental profits do not need to be reported to HM Revenue and Customs. This is of course not the case, and if taxable profits are received, then these simply must be reported.
Mr Mason was an employee of Acorn Limited, and had no other sources of income other than his £32,000 salary. At present, he would not need to complete a self assessment tax return. Acorn Limited generously offered Mr Mason a £18,000 pay rise. Although Mr Mason’s pay increased, his tax would increase too. This methodology is akin to receiving taxable rental profits. Additional tax has to be paid, and this would either be completed through completing a self assessment tax return or, in certain cases, there may be an option to just make an adjustment via the PAYE coding notice.
To summarise, as soon as you start to receive rental income you must consider your tax implications and determine if, when and how, you need to report to HMRC. For a vast number of landlords, this will mean completing a self assessment tax return.
Read part 2 of the guide to find out more about the types of income you'll need to pay tax on.
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