Renting out a property
Other tax issues
Do you charge rent to someone else for living in a property that you own? This page is for you.
What is property income?
Property income 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.
Property income 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?
Property income profits are taxable, unless they fall within one of the specific reliefs or allowances.
If the reliefs or allowances do 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 question below on working out your rental profits.
Rents are not usually taxed before you get them – unless you live abroad and are a non-resident landlord.
This means you may have to pay tax direct to HMRC. 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 resident then you generally have to tell HMRC about your income from overseas property.
Find out more on residence and how foreign income is taxed in our migrants section.
When calculating any amount that may be taxable in the UK, you broadly follow the same rules as apply to UK income (i.e. property income less allowable expenses). You should be able to use the property allowance if you wish. To the extent there is a UK tax liability, you might be able to claim relief against your UK tax bill if you have paid foreign tax on the income.
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.
If you are a non-Scottish taxpayer, the tax rate will be:
- 0% if your total employment income, other 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 are an additional rate taxpayer.
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 the case even if the property that is rented out is not in Scotland, but is in another part of the UK. This is because rental income is non-savings, non-dividend income. There is more information in our tax basics section.
For 2020/21, Welsh taxpayers pay tax using the same rates and bands as other non-Scottish UK taxpayers.
As property income is treated as ‘unearned’ income, you will not need to pay National Insurance contributions (NIC) on it. In some, usually quite uncommon situations, you might be treated as trading – for instance if you are running a bed and breakfast or hotel type business. In such cases, you would need to pay the appropriate NICs. If the business is not run as a company, this would mean paying self-employed NICs.
Letting out a room in your home
‘Rent-a-room’ relief may be available for the first £7,500 for 2020/21 (also £7,500 for 2019/20) of income arising from renting out a room in your main residence. We discuss this in further detail in our rent-a-room relief page.
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 (HS253) which you might find useful if you have this type of income.
Since 6 April 2017, a property allowance of £1,000 has been available to individuals who receive property income. There is more information 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 allowance of £1,000 in tax years commencing 6 April 2017 onwards.
If your total rental income (before expenses) in 2020/21 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 do not need to do anything for this to apply; it will apply automatically.
However, 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 (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 2020/21 is more than £1,000, you can choose, when calculating your taxable rental profits, between deducting the property allowance from your rental income, instead of actual allowable expenses, and calculating your taxable rental profits in the normal way (see below).
The best option will depend upon the level of expenses you have. If there are few expenses you may be better off with partial relief. Otherwise, it may be better to claim actual expenses. You will probably also wish to claim actual expenses if this produces a rental loss. You cannot claim any loss or deduction for actual allowable expenses if you elect to use the property allowance.
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.
If you wish to opt out of full relief, you must make an election for it 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 2020/21, you must make the election by 31 January 2023.
If you wish to use partial relief, you must make an election by 31 January, in the second year after the end of the relevant tax year. For example, if you wish to use partial relief for the tax year 2020/21, you must make the election by 31 January 2023.
In practice, you would usually make an election by ticking the relevant box on your Self Assessment tax return. Filing your tax return by the usual filing deadline will be accepted by HMRC as the relevant notification.
For more information on the property allowance, see GOV.UK.
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 onwards, your rental profits will normally be equal to the amount of income you actually 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 – if so, 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 'business', 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 for income tax purposes (although may be for capital gains tax purposes);
- 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;
- council tax and water charges;
- 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 restricted from April 2017 onwards.
Since April 2016, you have been able to deduct the costs you actually incur on replacing furnishings, appliances and kitchenware in the property. You can claim relief for a like-for-like replacement, or nearest modern equivalent. 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.
For more information on allowable expenses, see GOV.UK.
From April 2017, the tax relief on interest and other finance costs is restricted in relation to residential properties. Tax relief is restricted to the basic rate of income tax.
The change means that residential property finance costs are not taken into account when calculating taxable rental profits. Instead, your income tax liability is 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 was introduced in phases from tax years 2017/18 to 2020/21. During the phased period, you could 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.
‘Adjusted total income’ means your total taxable income after deducting personal allowances, but excluding savings and dividend 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 2020/21, you cannot deduct any of your interest and other finance costs from your rental income when working out your taxable rental profits. You must use 100% 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, who lives in England, has rental income of £12,000 in 2020/21. 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 2020/21 is:
|Mortgage interest (not deductible)||£nil|
|Less: Personal allowance||£(12,500)|
|Basic rate tax||£13,500 at 20%||£2,700|
|Tax reducer for finance costs||£4,000 at 20%||£(800)|
|Income tax liability||£1,900|
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, or if you do not earn enough to pay tax, this change affects how you work out your tax and in some cases can even lead to more tax being payable.
For example, suppose an individual has gross property income of £17,500, finance costs of £6,000 and other expenses of £3,000. The rental profit is therefore £8,500. Suppose also that this individual has pension income of £4,000 and savings income of £6,000.
Under the ‘old’ rules, the rental profit and pension income would have fallen within the personal allowance (which, in this example let’s say is £12,500) and the savings income would benefit from the full £5,000 starting rate for savings and £1,000 personal savings allowance, meaning no tax is due.
If the finance costs are disallowed in computing the rental profits, the starting rate for savings is then not available in this case. The taxable rental profit would be £14,500 and after adding the pension income (£4,000) and deducting the personal allowance (again, £12,500), £6,000 would be taxable at 20%. As this exceeds the starting rate for savings band of £5,000, the starting rate for savings is not available and only £1,000 of the savings income is tax free (as a result of the personal savings allowance). This means the total tax liability will be £1,000, calculated as:
- £6,000 at 20% (£1,200), being the tax on the rental income plus the state pension; plus
- £5,000 at 20% (£1,000), being the tax on the savings income; less
- £6,000 at 20% (£1,200), being the deduction in respect of the finance costs at the basic rate
The rules can also affect other entitlements and liabilities, such as the amount of student loan repayments due, as described in this news item.
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.
What if I lose money (make a ‘loss’) from renting out a 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 in the UK 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 2019/20 tax year makes a loss of £500 – the old windows were rotten so he had to pay for replacements which exceeded his rent for the year. He elects not to use the property allowance of £1,000, so that he can claim the loss.
In 2020/21, there are no major costs so his rental profit from the flat is £4,000.
Terry can carry forward the 2019/20 loss of £500 to 2020/21, meaning he only has to pay tax on £3,500 of rental income in 2020/21. That is, the £4,000 profit he made for 2020/21, minus the loss of £500 from the year before.
Terry could opt to make use of the property allowance in 2020/21 – if he does this, he will not be able to deduct any of his actual rental property expenses relating to 2020/21. 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. See also our pensions and self-employment page.
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.
The position can be summarised as follows:
|Gross rental income||Net rental income (profit)||Do I need to complete a tax return?|
|Less than £1,000||No, as the rental income is exempt under the property allowance. However, you might need to complete a tax return if you do not want the property allowance to apply and to claim a loss to carry forward.|
|More than £1,000 but less than £10,000||AND||Less than £2,500||You should contact HMRC to see if the tax on the rental profit can be collected via PAYE.|
|More than £10,000||OR||More than £2,500||You should complete a tax return.|
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 which is taxable, 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 concerned. For example, if you started getting taxable rental income in the year to 5 April 2020, tell HMRC by 5 October 2020.
Where the 5 October deadline is missed, you should still tell HMRC as soon as possible. As long as any tax due is paid on time (normally by the tax return deadline of the following 31 January), there will be no ‘potential lost tax revenue’ and no penalty to pay for having missed the 5 October deadline.
What if I have not disclosed my property income to HMRC?
We recommend that you seek advice as soon as possible to understand the likely exposure to tax, interest and penalties as a result of the non-disclosure of the income.
You should aim to bring your tax affairs up to date as soon as possible. Note that HMRC may receive information from third parties about the property income which you have received and you may be exposed to higher penalties if HMRC approach you before you approach them.
HMRC provide an opportunity for individuals to report undisclosed property income through the Let Property Campaign. For further information, please see GOV.UK.
What happens if I sell a property or let property out for a longer term?
Capital gains tax can arise if you dispose 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.
If the property has ever been your own home, you might qualify for relief from capital gains tax should you sell it. Note in particular that, for disposals after 6 April 2020, the ability to get capital gains tax relief for periods where the property is let is restricted. If you are at all uncertain about this, 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.
GOV.UK contains a detailed guide to Income tax when you let out a property.
HMRC’s technical guidance can be found in their Property Income Manual.
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. We tell you how you can find a tax adviser in our Getting Help section.
For more general information on your responsibilities if you are letting out a property in England and Wales, visit GOV.UK. If you are a landlord in Scotland, you should go to the Scottish Government website. If you live in Northern Ireland, you should go to the nidirect website.