What You Need to Know About Landlord Income Tax on Rental Properties
New research shows that rogue landlords are evading more tax than ever before. HMRC’s Let Property Campaign has been running for eight years, allowing people to come forward and voluntarily admit to paying less landlord income tax than they should or, in some cases, none at all. The alternative is to face tougher penalties if HMRC investigates and catches evaders.
Accountancy group UHY Hacker Young reports that, of those landlords who admit underpaying rental income tax, they did so by an average of £4,480. This is a 72% leap from the year before when the figure stood at £2,610.
HMRC has sent letters to a number of landlords it suspects are evading tax on rental properties. The body is warning them that it is becoming ever more effective at tracking down landlord income tax evasion. Short term holiday letting specialist AirBnB has already disclosed details of its UK hosts, with HMRC also working with letting agents and banks, and delving into tax returns, to uncover potential underpayment.
What Are The Landlord Income Tax Rules?
You are liable for tax on any profit that you make on renting out properties. The way to work this out is to take your rental income through the financial year and deduct your allowable expenses from the total. The amount of tax you pay depends on how much profit you make and your total taxable income during the year from all sources.
Your rental income includes the rent you charge your tenants as well as payment for any services you provide, such as cleaning, heating and so on. If you rent more than one property out, you add the profits from each together to find the total profit or loss from rentals. There are different rules if you rent a room in your house, rent a fully furnished holiday let, let a foreign property or are a non-resident landlord.
You should add this information to your tax return for the corresponding financial year.
Allowable Expenses For Landlord Tax Returns
There are a number of allowable expenses or landlord tax returns. The rule is that they should be wholly incurred in the process of renting out the property. This includes:
● The cost of maintenance and repairs (not including the cost of improvements - such as replacing lino with flagstones).
● Management fees and letting agent fees.
● Utility bills that you pay.
● Insurance payments for the property.
● Accountants’ fees.
● Direct costs that apply, such as phone calls made about the property, stationery used to send vital items relating to the rental, and so on.
● Travel expenses for trips solely relating to the property.
Rental Income Tax Allowances
Landlords can claim a rental income tax allowance of up to £1,000. You can also take advantage of a 20% tax credit on the portion of your buy-to-let mortgage that is made up of interest on your loan.
You can find out more about landlord income tax allowances from HMRC.
Punishments for Evading Landlord Tax Obligations
HMRC has the power to demand the payment of evaded tax. In the last five years, it claims to have recovered £142 million from 48,000 landlords. For serious breaches of the law, it can start criminal proceedings.
In recent cases, a landlord went to jail for two years after evading £59,000 in tax on 17 rental properties. Another had to repay £218,000 on 17 rentals, plus an additional £200,000 fine as well as serving a two-year prison sentence.
These landlord income tax rules are yet more admin for property owners to undertake in order to carry out lettings. If you want to free up some time to concentrate on building your business, you can outsource your property management services to us.