Landlord and property

What are the Tax implications for my Rental Properties?

Paying tax is one of the inescapable costs for any business, and this includes your let property. Any income you make through letting your property needs to be declared to HMRC, as well as paying the necessary taxes when buying or selling the property. However, there are many exemptions and allowances that could be applicable to your business that could make your investment all the more worthwhile.

Allowable Expenses

By calculating your ‘allowable expenses,’ this means you need only pay tax on your actual profit. This could include any, if not all, of the below:

  • Letting agent fees

  • Building and contents insurance

  • Council tax

  • Any direct costs of letting the properties e.g. travel expenses

  • For furnished properties - ‘wear and tear’ allowance of 10% of the annual rental income

Another thing to consider would be security deposits, something you may not expect to be tax deductible. Security deposits are not taxable when first received – if, for example, your tenant pays you a £400 deposit, you will not need to pay tax on this, as the assumption is made that you will not be keeping this money. However, say your tenants were to burn a hole in the carpet, which meant you kept the full deposit. At this point, the sum becomes taxable.

Capital Gains Tax

This is the tax you pay on the profit from selling an asset that has increased in value. As a landlord, Capital Gains Tax will be payable on your let property. However, Landlords can make a claim for certain costs, which are deducted from the amount paid in capital gains tax, such as Estate Agent and solicitors fees, and stamp duty, among others.

There is also an annual allowance that a landlord can gain that is exempt from Capital Gains Tax. If the property is owned by more than one person, the exempt amount is multiplied by the number of owners.

The ‘Rent-A-Room’ Scheme

If you are only renting out a part of your property – for example, you are letting out one of the rooms of your personal home - this scheme allows you to earn up to £4250 per year completely tax free, assuming that the room is fully furnished. However, this allowance is halved if you share this income with someone else.

When letting a property, a lot of your decisions will be made based upon whether the potential for future profit outweighs the initial expenditure. By understanding what allowances and exemptions apply to you and your let property, you can save money on your tax alone. Although some of these savings will be negligible, you may be pleasantly surprised when filling out your tax form at the end of the year.

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