As a landlord, how much tax do I have to pay on my rental income?
When you rent out a property in the UK you will have to pay income tax on any profits that you make on rental income. Most landlords are able to receive some tax relief on expenditure such as the interest paid on mortgage payments, however as part of the Finance Bill 2016, the Government announced that they would be restricting the amount of tax relief that residential landlords are able to claim. From April 2017, landlords will no longer be able to deduct all of their finance costs from their property income to arrive at their property profits; the reduction will be phased in over a 4 year period until the 2020-2021 Tax Year when the amount of relief will be set at a basic rate tax reduction.
Landlords will be able to obtain relief as follows:
- in 2017 to 2018 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction
- in 2018 to 2019, 50% finance costs deduction and 50% given as a basic rate tax reduction
- in 2019 to 2020, 25% finance costs deduction and 75% given as a basic rate tax reduction
- from 2020 to 2021 all financing costs incurred by a landlord will be given as a basic rate tax reduction
Prior to April 2016, a 'Wear & Tear' allowance was also available to landlords of furnished properties. This allowed landlords to deduct 10% from their rental income when working out their taxable rental profit to allow for the costs involved in replacing or repairing furniture and fittings, regardless of the actual expenditure that they made. This allowance no longer applies, instead landlords now must deduct the actual costs that they incur when replacing furnishings and must submit proof of how much they have spent to HMRC.
For official guidance on how to work out your rental income, tax liability and allowable expenses, please visit the official HMRC website at: https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income
28th March 2017
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