A lot of people ask for advice about the financial implications of renting out property they own, whether they want to rent out their own home temporarily, rent a property they own in another country or buy a property specifically to earn rental income.
If you decide to rent out a property, you’ll have to pay tax on any profit you make. The way you’re taxed depends on factors such as;
- whether you let the property as a holiday home
- If the property is in the UK or abroad
- If you’re just letting out your home in the UK while you live or travel abroad.
One thing to take into account is that you still have to pay tax on your rental for the tax year it’s due, even if you’re not paid until after the end of the tax year. You can also deduct expenses before they are paid in full if they relate to work that was carried out in the previous tax year.
How the amount is calculated
You should expect to pay income tax on any profits you make from renting out a property you own. The profit is what’s left over once you’ve deducted any expenses or allowances from the rent you charge plus money you get from your tenant – this could be extra charges for furniture, cleaning services or maintenance and repairs.
If you own more than one property, you can add all of your expenses together, and deduct expenses on one from receipts on another, unless one of them is abroad, as overseas properties are treated separately to UK properties.
How much will you pay?
Your rental profits are taxed at the same rates as employed or self-employed income, so you’ll have to pay 20 per cent, 40 per cent or 45 per cent, depending on your tax band. If you offer services over and above those normally provided by a landlord, the income is treated as trading income instead of rental income. This could be cleaning services, laundry or providing meals, although these are more likely to apply if you run a hotel or B&B business, or let a room out in a house you also live in, both of which are treated differently for tax purposes.
Your tax return
If you’re employed and don’t usually fill in a tax return – you may have to do so when you start renting out a property. You shour tell HMRC about any rental income as soon as possible after you start renting.
If your rental income is more than £2,500 per annum after allowable expenses, or more than £10,000 per annum before allowable expenses then you will need to complete a self assessment tax return. If your rental income is less than this it is best to contact the HMRC self assessment line regarding the income.
If you live and pay tax in the UK you must declare rental income from overseas property lettings on the foreign pages of your tax return. If you pay foreign tax on the income, you can usually get credit for this against the UK tax you have to pay on it.
Overseas property lettings
The amount of tax you’ll pay on a property you own overseas depends on whether you’re ‘resident’ in the UK, ‘ordinarily resident’ or ‘domiciled’:
If you’re resident, ordinarily resident and domiciled in the UK, you’ll pay tax on rental income whether you bring the money into the UK or not.
If you’re resident, but either not ordinarily resident or not domiciled in the UK, you can ask for tax to be calculated only on income received in the UK in the year.
If you’ve paid tax on your rental income abroad you can usually claim a credit against the UK tax you’ll have to pay on it, or deduct the foreign tax from your overseas rental income.
Resident: If you live in the UK for 183 days or more in a tax year, you’re a ‘resident’ for that year for tax purposes. If you live in the UK permanently or stay here three years or more you’re resident from the date of arrival.
Ordinarily resident: if you’re resident in the UK continually you will normally be treated as ‘ordinarily resident.’ You’re treated as ordinarily resident in the UK from the date you arrive if it’s obvious that you intend to stay for at least three years.
Domiciled: Your domicile is normally acquired at birth but can also be decided by a range of factors.
The tax rules for letting properties abroad can be complicated so if you’re unsure it’s best to get professional advice.
Furnished holiday lets
If you let a property out for short periods only (less than 31 days at a time) as a holiday home, and the property is in the UK or European Economic Area, you may be eligible for tax advantages as a Furnished Holiday Let (FHL). The property must be available for letting as furnished holiday accommodation for at least 210 days in the tax year to qualify. There’s more information on the criteria in the government guide ‘Furnished Holiday Lettings’
The above information is correct for the tax year 2015-16 however there are many changes on the taxation of rental income coming into affect in 2016-17 so watch out for an update on theses here in the next few weeks.
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