Common questions and misconceptions relating to Rental Income from Residential Property
I thought I would share some common misconceptions that are made by clients when discussing the subject of residential rental properties.
"I don’t need to declare my rental income as I don’t use my personal allowance and only have a small profit on the rental income."
Whilst it may not result in tax being paid by the individual it is still reportable on a self-assessment tax return in the following circumstances:
- Rental Income between £2,500 - £9,999 after allowable expenses
- Rental Income £10,000 or more before allowable expenses
- Where Rental Income is less than £2,500 – you need to contact HMRC who may be able to collect any tax due through PAYE if not you will need to complete a self-assessment tax return.
"I don’t need to declare any income from property as I am only renting out the house whilst I am working abroad to cover the cost of my mortgage."
This is incorrect and whilst the actual tax treatment will depend on the actual circumstances regarding the individual's tax and domicile status this is still classed as taxable income that needs to be disclosed on a self- assessment tax return. However, there are specific rules that relate to letting out a property in the UK while you live abroad and these would need to be considered.
"The rent that I receive is covered by the mortgage repayments, therefore I don’t make any profit on my rental and don’t need to declare it."
This is incorrect from two perspectives. Firstly, if the rental income before expenses exceeds £10,000 then you would have to prepare a self-assessment tax return regardless of the allowable costs against it. For most properties that are let in the UK £10,000 per year or £833 per month is easily exceeded especially in the Essex area where a 2-3 bedroom house would achieve this level of rental easily.
Secondly, it is not the actual mortgage repayment that is an allowable expense it is only the interest element of the repayment that is allowable. A further issue to consider is that since 2017 the tax relief has been restricted on mortgage interest and a reduction to basic rate tax relief has been phased in with full implementation in place from April 2020. This restriction does not only apply to mortgage interest but associated finance costs such as fees and any other incidental costs for getting or repaying mortgages. This will affect any higher rate tax payer and plans should be put in place to ascertain the impact that this could have on future income and tax payments that may be due.
"Whilst my rental income includes a contribution towards gas and electricity I have excluded these as they are not part of my rental income as covered by costs I incur."
Rental income includes any money received in respect of the rental property including not only the rent but contribution to utility costs (gas, electricity and water), fees for the cleaning of communal areas, including parking and fees for use of furniture. Any other income that may be received in respect of the rental property such as cleaning services (non-communal areas), laundry services and meals provided would need to be treated as trading income and not rental income. The relevant costs for the additional income items would be treated as an allowable expense against the rental income.
Can you tell me what types of expenses could be claimed against my rental income?
Expenses that are likely to be claimed against rental income include insurances (contents, buildings, landlord), general repairs to the building, any utilities paid for the building (gas, elec, rates etc), interest on the mortgage for the property, letting agents fees, accountants fees, legal fees relating to a let that is less than one year old or renewing a lease less than 50 years old, ground rents or service charges, wages of specifically hired help, phone calls (relating to rental only), stationary and advertising expenses and vehicle costs (relating to rental only). Expense receipts should be kept at all times even if stored electronically.
The following are NOT allowable expenses against rental income: home improvement costs, capital repayments on mortgage, private phone calls and any other personal expenses. When considering repairs it is important to understand what would be classed as a rental expense for income tax purposes and what would be classed as a capital cost used for capital gains tax purposes.
As you can see, renting out a residential property is not clear cut and in particular, I am concerned that many landlords will be thinking that the mortgage repayment = rental income argument is enough to determine that they do not need to do a self-assessment tax return when in fact they do.
Estate and Letting Agents also have a responsibility to provide details to HMRC annually in respect of the landlords that they act for – this may mean if you are not already disclosing your rental income that you are already on the radar for HMRC. HMRC have targeted landlords on several occasions and even have a Let Property Campaign for voluntary disclosure relating to this specific issue, this means that there are likely to issue significant penalties and surcharges to anyone that continues to not comply with the legislation.