A Landlord’s Guide to Property Investment: Tax Implications

Tax requirements and implications can be complicated for landlords. With many different tax bands and types out there in the UK, it can be difficult for landlords to know which ones they have to pay and when. Also, landlords are constantly looking at ways to pay minimum tax on their earnings whilst also playing by the book, so to speak. With so many different options and solutions available to those looking to rent out a house other than their own, here’s a tax guide for landlords, whether you’re brand new to the venture or a veteran landlord.

What taxes do landlords have to pay in the UK?

There are many different types of taxes that a landlord could be subject to. It often depends on whether or not they’ve set themselves up as a limited company, whether they’re married or in a civil partnership, if they experience any losses throughout the financial year and the amount of profit they actually make every year. We’ll touch on when a landlord will need to pay Capital Gains Tax, Income Tax, Corporation tax and more, in further detail later in this article. But for now, let’s discuss what a landlord can expect to pay, tax wise, as a minimum.

Stamp Duty Land Tax (SDLT)

Stamp duty is something that everyone has to pay when buying a property, unless you’re a first time buyer. This is paid when a rental property is initially purchased, no matter how many you buy or when. It’s important to note, however, that if you purchase a buy-to-let property or a second home with more than £40,000, you’ll pay an additional 3%, applying to the whole amount as there isn’t a ‘zero’ tax band when additional properties are purchased.

Wales: Land Transaction Tax (LTT)

The equivalent to SDLT in England, Wales has a Land Transaction Tax (LTT). A higher rate is applied in Wales for investment properties and second homes, standing at an additional 4%. Much like in England, the additional rate is applied to the whole amount over £40,000 and is payable within 30 days of completion; no later.

Scotland: Land & Buildings Transaction Tax (LBTT)

In Scotland, insead of SDLT and LTT, they have Land & Buildings Transaction Tax (LBTT). The additional rate charged in Scotland for additional properties currently sits at 6% and will be applied to the total purchase price and must be paid within 30 days of completion, much like in Wales.

Tax on rental income

Much like when you have a salary, you will need to pay tax on what you make from your rental income. You will still receive a tax-free allowance and the amount you pay will also depend on the number of expenses you have claimed, so no one calculation can be universally applied to landlords throughout either England, Scotland, Wales or Northern Ireland. If you aren’t sure how to calculate the amount of tax you owe on your rental income, then speak to an accountant, such as the professionals we have here at RLTP Accountants.

Tax on rental income when you own multiple properties

Most landlords will have several different properties that they rent out. If this is the case, then tax liabilities will be looked at in much the same way as someone who is running their own business. You will need to complete a Self Assessment, or ask an accountant to do it for you. British rental properties, expenses and rental income will need to be separately accounted for, keeping them segregated from any overseas rentals and holiday lets. There are different tax implications on holiday lets, something you can read more about here.

What expenses are landlords allowed to claim for?

If you’ve just started on your rental property venture, then you might not be aware that you can claim expenses as a landlord. But your expenses claimed will be deducted from any profit you make which can reduce your tax liability. Therefore, you must make and keep a record of every pound you spend on your rental property. This includes keeping receipts and invoices, even for the smallest of things. Essentially, you need to keep everything that’s related to any money spent on the upkeep, management and letting of the property itself. But there is a limit on what landlords can claim expenses on.

Things landlords are able to claim as expenses

Landlords can claim for the day-to-day costs involved in the maintaining, letting and managing of their rental property, as already touched upon. But you need to prove that those expenses are needed in order to ensure the generation of income. For example, you could claim expenses for fixing a leaking water pipe in a property as it cannot be lived in comfortably without the repair being made.

But you wouldn’t be able to claim expenses for a new shelf in an under-stairs cupboard, for instance. The latter has no effect on whether or not the property can be lived in, it’s merely a preference that either yourself or your tenant has. The things you’ll be able to claim expenses on includes, but is not limited to, the following:

• Business costs, like travel costs or the cost of running a home office, for example
• Fees payable to professionals, like accountants, letting agents, solicitors etc
• Insurance cover, like contents or buildings insurance as well as rent guarantees
• Replacement fittings and furnishings
• Repairs made to fittings and furnishings
• Maintenance services, such as cleaning or gardening
• Service charges for leasehold properties
• Ground rent
• Utility bills
• Council tax bills
• Bad debts

What happens if a landlord makes a loss in the financial year?

Sometimes, a landlord’s allowable expenses can come to more than the rental income that’s generated throughout the year. If this is the case, for tax purposes, this will be considered as a loss. All losses are carried through to the next financial year and, eventually, offset against any available profits. This has to be done every single year so as to avoid having to pay tax at a higher rate.

For example, let’s say that for the tax year 2022/2023, you earn £15,000 in rental income, but your allowable expenses come to £18,000, then you’ll have made a £3,000 loss that year and so you’ll not pay any tax. But fast-forward to the tax year 2023/24, your rental income is still £15,000 but you push your expenses down to £13,000, allowing for a £2,000 profit, then the £3,000 loss that came about the previous year will be deducted from the profits made in 2023/24, leading to a £1,000 loss. In this case, again, you will not have to pay any tax. But what happens if you start to make a profit and not a loss?

For 2024/25, let’s say your expenses drop to £11,000 but the income you get from your rental property increases from £15,000 to £15,450, this will give you a profit of £4,450 for that tax year. Because of your £1,000 loss from the previous year, this is taken away from your profit made for 2024/25, leaving you with a taxable income of £3,450, so you will have to pay Income Tax in this case.

Do landlords pay tax on income generated from renting a room?

If you are renting out a single room that sits in your own property, then you’ll be able to benefit from generating £7,500 a year, tax-free under the ‘Rent a Room’ scheme. Where this might sound like a good solution to paying minimal tax, you will need to double check whether this would actually be advantageous when compared to other solutions, such as deducting business letting expenses from the rent, such as repairs, maintenance, insurance etc. However, it’s important to note that, in this instance, there will be a private use restriction for general home expenses and you could be subject to Capital Gains Tax if you come to sell your home.

Corporation Tax vs. Capital Gains Tax & Income Tax

Capital Gains Tax will be payable if you sell or transfer ownership of a residential property that’s not your own home. Any profit made on the aforementioned will be subject to Capital Gains Tax. The ‘gain’ in this case refers to the difference between the price the property was initially purchased for and the price it sold for, not the equity you’re left with post-sale.

Income Tax is paid on the rental income a landlord receives, just as you would pay Income Tax on a general salary, but your tax-free allowance still stands in this case. The expenses you claim for can affect the amount of Income Tax you pay, if any, as already discussed.

Corporation Tax, on the other hand, will apply to you if you have set up a limited company within the UK to run your rental empire from. You will pay Corporation Tax on all profits made in this case. Where it’s unlikely that you’ll be paying all three at once, it’s common for landlords to pay at least one form of tax when renting out a residential property that is not their own.

Can I set up a limited company to let properties out through?

Yes, you can set up and use your limited company to let properties out through. However, you will be subject to Corporation Tax, just like every other business that operates throughout the UK and this tax is paid on all profits made by the company. If this is a road you want to go down as a landlord, then you will need to register for Corporation Tax and subsequently prepare for and file a Company Tax Return. If you have an accountant on hand to help you, then they’ll be able to do all of this on your behalf. You will also be required to file statutory accounts with Companies House together with a Confirmation Statement every year.

Tax savings for married couples & civil partners

Sometimes, the tax rules change depending on whether or not you’re married or in a civil partnership. Something else that affects tax savings is if one of you pays Income Tax or if both of you pays Income Tax. This could affect your marriage allowance, which allows you to transfer £1,260 of your personal allowance to your spouse or civil partner. If one of you earns less than the personal allowance, which currently sits at £12,570, and the other pays Income Tax at the basic rate, then you could benefit from marriage allowance tax savings.

If, however, you both pay Income Tax, then you could set up a business partnership. This will enable you to evenly share the profits you make, with the only downside being that you would both have to pay tax on your individual share. The only benefit of doing it this way is that you could avoid one of you paying tax that falls within a higher Income Tax band.

It’s a complicated set up to begin with and it might take time for you to get an understanding of the pros and cons, which is why you should ask for professional help from our team of accountants here at RLTP Accountants. No matter how many questions you have, we’ll take the time to sit with you and explain everything you need to know in order to make the right decision, with our expert advice and guidance.

How to keep on top of your taxes as a landlord

Whether you’re a brand new landlord just starting on your venture or a seasoned, experienced landlord with multiple properties, it’s important that you’re keeping on top of what you owe the HMRC. Landlords are required to operate under strict rules when it comes to paying tax, so it can be a minefield of information for those who aren’t sure where to start but worry about not doing things by the book.

If this is the case, then you need to contact the professionals for help. Here at RLTP Accountants, we have a team of dedicated, highly-qualified professionals who are fully-trained in order to give you the best possible advice and deliver exceptional accounting services every single time. As experienced accountants, you can rely on us to take the stress out of owning your own property empire.