Last Updated: 10/03/2016
Being a landlord is a great way to bring in additional income but it is important that landlords understand all of their duties and requirements. One thing that many landlords overlook or are unaware of is the issue of tax. This brief guide to “landlord tax” will hopefully make a few things clearer but as always with tax, it is best to speak to an advisor who can provide you with information that is tailored to your circumstances.
Do I have to pay tax on my letting income?
This is not definite and is one area where personal circumstances and finances will dictate. As an example, a landlord with a buy to let mortgage who find that the cost of the mortgage and maintenance of the property exceeds their income will not have to pay tax on rental income.
Income tax is due to be paid on rental income received from letting out property and any profits made from letting are classed as taxable income.
If your rental income, after all allowable expenses, is smaller than the landlord’s personal allowance, there will be no need to pay tax. There are also special rules in place for taxation of landlords who are non-resident (NRL) and for landlords who stay abroad.
Are there expenses that can be offset against rental income?
If you incur costs that are “wholly and exclusively” for letting purposes, then yes, these can be incurred against rental income. Aspects like mortgage interest, maintenance and repairs, insurance and property management fees can all be classed as expenses which can be offset against rental income.
Do I need to maintain records?
Yes, it is important to maintain a record of all income and expenditure with respect to lettings. These record should indicate when payments were made and to whom and when income was received and from whom.
Areas where records should be maintained include:
• Water and additional rates
• All maintenance and repair work
• Property management service fees
• Wear and tear of property (which can be claimed for furnished lets)
Important dates to remember:
• 31st of January – The deadline for completing tax for the previous tax year and for paying tax
• 6th of April – the beginning of the new tax year
• 31st of July – the second payment for account due for the current tax year
• 30th of September – the deadline for submitting a tax return for any landlord looking for Inland Revenue to calculate how much tax is due
It is also important to report and record income in the correct manner. Recording income from letting property is generally a straightforward process but there are some areas that need to be remembered by landlords.
Refundable deposits A landlord should take a refundable deposit at the beginning of a tenancy and this shouldn’t be viewed as income. However, if this deposit is forfeited by the tenant at the end of the deposit, say to cover unpaid rent, it should be classed as income at that point. Also, if the deposit is retained to cover cleaning costs or damages, this should be classed as a deposit. With this last point, it may be that this deposit is offset by the cost of cleaning, repair and maintenance over the course of the tenancy.
Rental advance If a rent advance straddles two tax years, only the applicable part will be considered income for the relevant year.
Unpaid rent This is still classed as income for the year it is due but if a default is made and not eventually recovered, unpaid rent should be considered as a bad debt and claimed as such.
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