Renting out a property
Do you charge rent to someone else for living in a property that you own? Having income from property means you need to consider your tax position, tell HMRC about it and possibly pay extra tax if you make a profit.
Here, we aim to explain how under the following headings:
What is income from property?
Income from property is generally any income from land or buildings, including rental income from a flat or house or from part of a flat or house, such as a room or a parking space. Rental income from other sources, for example a caravan, a caravan pitch or a houseboat, is also included.
Income from property does not include income from a trade, for example farming, running a hotel or carrying on an unrelated business, for example arts and crafts or hairdressing, from home. Profits relating to a trade are taxable as self-employment income. You can find out more in our section on self-employment.
Do I have to pay tax on income from property?
Unfortunately, probably yes you do have to pay tax on property income! Property income profits are taxable, unless they fall within one of the specific reliefs or allowances.
If the reliefs or allowancesdo not apply to your income, then you will need to pay income tax on any profits – broadly, property income less allowable expenses.
‘Income’ is normally the rent due from the tenants, but also taxable are payments in kind, for example, gardening or cleaning the property instead of paying rent. For more information, see the section below on working out your rental profits.
Rents are not usually taxed before you get them – unless you live abroad and the non-resident landlord scheme applies. This means you may have to pay tax direct to HMRC. You can find more information on the GOV.UK website. See ‘do I need to complete a tax return?’ for more information.
Do I have to pay UK tax on income from a property overseas?
The answer depends on your circumstances. If you are a UK taxpayer then you probably at least have to tell HMRC about your income from overseas property. You might be able to claim relief against your UK tax bill if you have paid foreign tax on the income.
Find out more on residence, domicile and how foreign income is taxed in our 'migrants section'.
Importantly, income from overseas property is not added together with UK property income and you have to show it separately as foreign income if you complete a self assessment tax return.
What will the rate of tax be on my property income?
If your property income is taxable, you will pay tax at the relevant income tax rate, after employment income and other earned income, such as self-employment profits or pension income, has been taken into account.
The tax rate will be:
- 0% if your total employment income, earned income and property income all fall within your personal allowance;
- 20% if you are a basic rate taxpayer;
- 40% if you are a higher rate taxpayer; or
- 45% if you pay the top ‘additional’ rate of tax.
For the bands of income which are taxable at each rate above, see our ‘tax and NIC rates’ page.
If you are a Scottish taxpayer, you will pay tax at the appropriate rates according to the Scottish rates and bands of income tax. This is because rental income is non-savings, non-dividend income. There is more information in our 'tax basics section'.
As property income is treated as ‘unearned’ income, you will not need to pay National Insurance contributions (NIC) on it.
Letting out a room in your home
‘Rent a room’ relief may be available for the first £7,500 for 2017/18 (£7,500 for 2016/17) of income arising from renting out a room in your main residence. We discuss this in further detail in our ‘rent a room’ section.
Furnished holiday lettings
There are also special rules for furnished holiday lettings – property which is let out on a short term, usually seasonal basis, to tourists and visitors – which are not discussed further here. HMRC produce a helpsheet which you might find useful if you have this type of income. You can find the helpsheet on the GOV.UK website.
From 6 April 2017, a property allowance of £1,000 is available to individuals who receive property income. There is more information in the section below.
Note that it is not possible to use both rent a room relief and the property allowance against the same property income.
Individuals who let out property are eligible for a property of allowance of £1,000 in 2017/18.
If your total rental income (before expenses) in 2017/18 is less than or equal to £1,000, you do not have to declare it to HMRC and you do not have to pay any tax on it. You can choose to be taxed on your property income in the normal way (see below) if you wish, for example, if your expenses are greater than your rental income, you may wish to do this so that you can claim the rental loss. You cannot claim any loss or deduction for property expenses if you use the property allowance relief.
If your total rental income (before expenses) in 2017/18 is more than £1,000, you can choose, when calculating your taxable rental profits (or loss), between deducting the property allowance from your rental income, instead of actual allowable expenses, and calculating your taxable rental profits (or loss) in the normal way (see below). You cannot claim any deduction for actual allowable expenses if you elect to use the property allowance. Use of the property allowance cannot produce a rental loss.
You can choose whether or not to use the property allowance for each tax year separately, as each election applies only for that tax year.
You must make an election for full relief not to be given by 31 January, in the second year after the end of the relevant tax year. For example, if you wish to opt out of full relief for the tax year 2017/18, you must make the election by 31 January 2020.
You must make an election for partial relief to be given by 31 January, in the second year after the end of the relevant tax year. For example, if you wish to opt out of full relief for the tax year 2017/18, you must make the election by 31 January 2020.
If you are claiming rent a room relief in relation to your property income, you cannot claim the property allowance for that same income.
Prior to 6 April 2017, rental profits were equal to the amount of income you were due to receive from letting, less any ‘allowable expenses’ (the accruals basis).
From 6 April 2017, your rental profits will normally be equal to the amount of income you receive from letting, less any ‘allowable expenses’ (the cash basis), unless you elect for the accruals basis to apply.
What is ‘income’?
From 6 April 2017
From 6 April 2017, if you are an individual and your total income from letting out property is less than £150,000, you will normally work out rental profits on the cash basis. You can choose to work them out on the accruals basis, which applied to all rental profits prior to 6 April 2017, if you prefer – you need to elect this basis on your tax return.
The cash basis means that you take into account income (rent) that you have actually received from your tenant during the tax year.
So, let us say that Colin is renting a property from you and you agree he will pay you £300 a month, but he gets behind with rent and misses a month. At the end of the year, you have only received 11 months’ rent. So, you only have to include 11 months’ rent in your tax return.
Prior to 6 April 2017 (and after if chosen)
Note that in relation to the period prior to 6 April 2017 we say above ‘income you are due to receive’ rather than ‘income you have received’. This means that you pay tax on the rent that your tenant should have paid you rather than what they actually paid you.
Let us say that Simon is renting a property from you and you agree he will pay you £400 a month, but he gets behind with the rent. You still have to pay tax on the £400 a month he was due to pay you, even though you did not actually get it.
But if it becomes clear that you are never going to recover the money you are owed, you might be able to claim this as an expense against the rent – known as a ‘bad debt’.
What are ‘allowable expenses’?
Allowable expenses are basically expenditure, other than capital expenditure, like improvements to the property, incurred ‘wholly and exclusively’ for the purposes of the rental, for example:
- the cost of repairs and renewals which are necessary to maintain the property in a suitable condition to let out. Note that if you spend money on improving a property, such as adding an extension, or have to do work to the property to make it suitable to rent out when you first let it, this is not allowable;
- the cost of insurance;
- costs of finding a tenant, such as advertising;
- legal costs on the renewal of a letting agreement;
- letting agents’ fees, if you use one;
- interest on money borrowed to purchase or improve the property. Note that if you have a repayment mortgage, the amount you pay off the loan balance – the ‘capital’ element – is not an allowable expense. Tax relief on interest is being restricted from April 2017 onwards.
From April 2016, you can deduct the costs you actually incur on replacing furnishings, appliances and kitchenware in the property. You can claim relief for a like-for-like, or nearest modern equivalent, replacement. You can also claim the costs of disposing of the old asset, although you have to set off anything you receive for the old asset against those costs first.
This replacement relief is instead of 'wear and tear' allowance, which was available until April 2016 if you let a property which was furnished – meaning that you supplied beds, sofas, white goods and so forth so that someone could live in it without needing their own furniture. Note that the replacement relief for furnishings is available to all landlords, not just those who let out fully-furnished properties.
From April 2017, the tax relief on interest and other finance costs is being restricted in relation to residential properties. Tax relief will be restricted to the basic rate of income tax.
The change means that residential property finance costs will not be taken into account when calculating taxable rental profits. Instead, your income tax liability will be reduced by a basic rate tax reduction – for most individuals this will be the interest and other finance costs at the basic rate of tax.
The restriction is being phased in between tax years 2017/18 and 2020/21. During this four year period, you can deduct some of your interest and other finance costs when calculating your taxable rental profits and use the remainder to work out your basic rate tax deduction.
The tax reduction is the basic rate value (currently 20%) of the lower of:
- the appropriate proportion of interest and other finance costs;
- property profits;
- adjusted total income.
The tax reduction cannot create a tax refund, so if the reduction is calculated using either of the property profits or the adjusted total income then the difference between that and the finance costs is carried forward to future tax years.
The restriction applies to interest on mortgages, loans and overdrafts and other finance costs.
In 2017/18, you can deduct 75% of your interest and other finance costs from your rental income, when working out your taxable rental profits. You must use the other 25% of your interest and other finance costs to work out your basic rate tax deduction, which you can take off your income tax liability.
Carrie has rental income of £12,000 in 2017/18. Her allowable rental expenses are £1,000. Her mortgage interest is £4,000. She also has employment income of £15,000.
Her income tax liability for 2017/18 is:
|Mortgage interest (75% x £4,000)||£3,000|
|Personal allowance||£11,500 at 0%||0|
|Basic rate tax||£11,500 at 20%||£2,300|
|Tax reduction (25% x £4,000)||£1,000 at 20%||-£200|
|Income tax liability||£2,100|
If you are a Scottish taxpayer, this change will also affect you. The basic rate of tax used will be the rate set by the Scottish Parliament, but otherwise, the same principles apply. For more information about Scottish income tax, see the ‘tax basics section’.
If you are a basic rate taxpayer, this change affects how you work out your tax, but you will not have to pay more tax than before.
If you claim child benefit, tax credits or means-tested benefits, this change may affect how much income you must declare. It may affect how much tax credits or benefits you receive, or may mean the high income child benefit charge applies to you.
My tenant has paid a deposit up front. Do I have to pay tax on it?
This is a common point of confusion. Your tenant pays you, say, two months’ rent up front as a deposit in case of damage while they are occupying the property. You need to know whether you include it when working out your taxable rental income.
The answer, assuming the terms of the agreement treat the deposit as refundable to the tenant if there is no damage, is that you do not include the deposit at the time you receive it. Technically the money is not really ‘yours’ anyway and you have to protect it in a government scheme.
But when the tenant moves out, let us say you agree that you will keep £200 of the deposit for repairing the plaster on the hallway wall, which has been damaged when the tenant was moving furniture. At that point, the £200 you keep is included in your taxable rental income, but the rest of the deposit returned to the tenant is not. The cost of repairing the wall is also an allowable expense, so effectively the two are likely to cancel each other out.
Note that 'wear and tear' allowance is no longer available from April 2016.
Prior to April 2016, if you let out a furnished residence, you could deduct a ‘wear and tear’ allowance of 10% of your rental receipts. You had to take off any ‘tenant’s expenses’ that you had paid – these are expenses which are paid by you, but which would normally be paid by tenants, such as gas, electricity or council tax.
Some people chose to claim a wear and tear allowance as it could be simpler than keeping track of all of the renewals relating to the letting.
If you elected to claim a wear and tear allowance, you could not claim a deduction for the actual amount you spent on buying and replacing the items covered by the allowance – such as fridges, freezers, beds, sofas and other furniture. You could, however, claim for repairing the items if they broke down. You could also still claim for the cost of replacing fixtures which are an integral part of the building, for example washbasins or baths.
You could still claim for other allowable expenses, like the cost of finding a tenant and so on.
Billy lets out a property which is furnished. The rental income is £4,000, so in 2015/16 he elects to claim wear and tear allowance of 10% of the rents – that is, £400. In the same tax year, the fridge breaks down and the engineer’s fee is £100, so Billy can also claim the repair cost. But had the fridge been broken beyond repair and cost £250 to replace, Billy could not have claimed the replacement cost on top of the wear and tear allowance.
What if I lose money – make a ‘loss’ – from property?
If you lose money – make a ‘loss’ – from renting out a property – that is, your allowable expenses are more than your income – you may be able to take it off a profit from renting out another property, as generally all your rental income is treated as one ‘rental business’.
Otherwise, the loss will generally be carried forward to the next tax year and deducted against the profit for that year, if you make one.
Terry lets out a flat and in the 2016/17 tax year makes a loss of £500 – the old windows were rotten so he had to pay for replacements which wiped out his rent for the year.
In 2017/18, there are no major costs so his rental profit from the flat is £4,000.
Terry can carry forward the 2016/17 loss of £500 to 2017/18, meaning he only has to pay tax on £3,500 of rental income in 2017/18. That is, the £4,000 profit he made for 2017/18, minus the loss of £500 from the year before.
Terry could opt to make use of the property allowance in 2017/18 – if he does this, he will not be able to deduct any of his actual rental property expenses relating to 2017/18. If we assume that there were no expenses deducted in reaching the rental profit figure of £4,000, Terry could deduct the property allowance of £1,000, leaving him with taxable profits of £3,000, which could then be reduced to £2.500 by the loss of £500 from the year before.
Does property income count towards my earnings for pension contributions?
Property income does not normally count as relevant earnings for pension contribution purposes as it is treated as ‘unearned’ income.
But if you are running a business from a property, such as a bed and breakfast, and your profits are treated as being from a trade, those are ‘earnings’ for pension purposes.
You may need to complete a tax return if you have rental income which is taxable, although sometimes HMRC can collect the tax on a small amount of rents against your Pay As You Earn (PAYE) code if you are an employee or a pensioner.
More information on needing to complete a tax return can be found in our separate guidance on this topic.
If you start getting rental income, you should tell HMRC about it – contact them as soon as possible, but at the latest by 5 October following the end of the tax year in which you start to let the property. That is, if you start getting rental income in the year to 5 April 2018, tell HMRC by 5 October 2018.
What happens if I sell a property or let property out for a longer term?
Capital gains tax can arise if you make a disposal of an asset. That might not be selling it altogether, but it could be giving away part of it or even giving someone a partial interest in a property – which could mean granting someone a ‘lease’ and them continuing to pay you some rent.
The rental rules we explained above assume that you are only letting out property on a short term basis. If you are granting a let or lease for a longer term – 50 years or more – you will need to consider taking professional advice from a solicitor and a tax adviser. You can find an adviser on the Chartered Institute of Taxation website.
If the property has ever been your own home, you might qualify for relief from capital gains tax. But again, we would suggest you take advice.
Where can I find more information on property tax issues?
You can find more information on the rent a room scheme on the dedicated page in this section.
If you have income from overseas property and have come to the UK from abroad, you might find our 'migrants section' helpful.
More on the special rules for furnished holiday lettings can be found on the GOV.UK website.
You need to be careful about capital gains tax if you sell or dispose of a property – in whole or in part. You may need to consult a tax adviser for help. You can find an adviser on the Chartered Institute of Taxation website.
For more general information on your responsibilities if you are letting out a property, visit the GOV.UK website. There are separate sections for landlords in England and Wales and landlords in Scotland. If you live in Northern Ireland, you should go to the nidirect website.