If you’re considering becoming a landlord and renting a property, or if you’re already in the process of doing so, it’s important to be aware of your tax obligations.

Rules on paying tax when renting out your property are ever-changing and can be quite complicated. We’ve created a comprehensive guide of some of the things you need to be aware of when it comes to the tax implications which come with renting out a property.

How does renting a property impact my income tax?

Any rent that you receive, any non-refundable deposits or any additional payments that you get from your tenants, such as the cleaning of communal areas, property repairs or utility bills all class as income and must be declared. The same principle applies for any money that's kept over from a returnable deposit at the end of the tenancy.

Any rental profits are taxed at the same rates as the income you receive or would receive if you have additional employment, 0%, 20%, 40% or 45%, depending on which tax band the income falls into.

If your rental income is added with the extra income you earn, you may get tipped into a higher tax bracket. If you’re considering renting out a property as a secondary source of income this is something which you may want to be aware of.

When it comes to paying your tax on rental income, you must declare rental income for the tax year it’s due, even if you’re not paid until the tax year is over.

When it comes to expenses, you can deduct any allowable expenses which relate to work done for a particular tax year, regardless of whether you pay the bill before or after the end of the tax year.

Landlord tax relief

Before April 2017, any interest private landlords paid towards mortgage payments could be deducted from their rental income before you paid tax on it.

However, since the 2017-18 tax year, a new buy-to-let tax system was phased in. From 2020, private landlords won’t be able to deduct any mortgage interest payments from your rental income before paying tax – instead, the entire sum of your interest payment will then qualify for a 20% tax relief.

Landlords in higher tax brackets could be at risk of paying much more tax than previously, as rather than paying the rental income minus their yearly mortgage, they’ll be paying a percentage of the total rental income.

Do I pay capital gains tax on property?

If you’re looking to sell a buy-to-let property, you’ll likely face a capital gains tax bill depending on the gains you make, rather than the amount you sell the property for. Equally, if you’re letting all, or part of the property, a proportion of any gain when you sell it could be taxable.

Basic-rate taxpayers will pay 18% on the gains they make by selling a property, while higher and additional rate taxpayers pay 28%.

In 2019-20, you can make tax- free capital gains of up to £12,000 and couples who jointly own assets can combine this allowance, potentially allowing a gain of £24,000.

If you currently, owe CGT due to a property sale, you’ll have until the next self-assessment tax deadline to pay the tax owed. However, from 6 April 2020, anyone who makes a taxable capital gain from UK residential property will have to pay the tax owed within 30 days of the completion of the sale or disposal. You'll do this by submitting a 'residential property return' and making a payment on account.

It’s important to note that if you used to live in your rental property, you may be able to claim letting relief, which will reduce your capital gains tax bill.

If you’re a landlord, or considering renting out your property and want to know more about the potential tax implications which you could be facing, contact haart. We can help.