When you are calculating the net rental profit for your property lettings portfolio, allowable expenses should be deducted from the income to determine the net profit. Rental income on foreign property needs to be declared separately as foreign income.

You should also know:

• You’re allowed to deduct expenses on one property against the receipts on another. You must pay tax on any profit.
• You have to apply for a Class 2 National Insurance if being a landlord is your main job, you rent out multiple properties, and your profits are over the amount specified by HMRC per year.

Calculating rental income

Depending on the agreement you have with your tenants the rental income could include:

• Rent for the letting of your property (e.g. houses, flats, apartments, office space, etc.).
• Permits associated with your property (e.g. parking permits, sporting rights, etc.).
• Fixed service charges (e.g. fees for maintaining communal areas, utility charges, etc.).
• Variable service charges (e.g. arranging property repairs).
• ‘Sinking’ funds (e.g. slush fund for emergencies, unexpected structural maintenance, etc.).
• Easements allowing your tenant to use your property in a specific way.
• Sums received for the use of furniture, furnishings, etc.
• Reverse premiums and deemed premiums.

Calculating allowable expenses

You can offset some of your rental property’s costs by claiming any expenses you incur wholly and exclusively for your rental property.

Alternatively, if you incur an expense that is only partially for your rental property, but you are able to calculate a definite proportion used wholly and exclusively for your property business, you are able to deduct that proportion. For more information, see the HMRC’s Business Income Manual.

Items that can be claimed

• Home maintenance costs
• Interest on mortgage and loans used to repair the property
• Management fees paid to a letting agent
• Misc. costs e.g. advertising
• Ground rent
• Service charges (including utility bills)
• Accountant fees
• Vehicle running costs
• Council tax
• Insurance (including landlord insurance)

Items that cannot be claimed

• Home improvement costs
• Full costs of mortgage or loans used to repair the property
• Management fees paid to you (the landlord) for your labour
• Personal costs e.g. clothing
• Capital expenditures

Additional allowable expenses for furnished properties

• Capital Allowances–You can claim capital allowances on furnished holiday homes and commercial properties, provided you meet certain requirements.
• Wear and Tear Allowance – If your residential letting is furnished, you can claim 10% of the net rent as a “wear and tear allowance.” Net rent is the total rent received less costs a tenant usually pays (e.g. Council Tax) have been deducted.

Calculating tax on rental income

Your rental income consists of the rent you receive from your tenants plus any funds you receive for covering various service charges.

Depending on the tenancy agreement, your rental income could include:

• Rent for the letting of your property (e.g. houses, flats, apartments, office space, etc.).
• Permits associated with your property (e.g. parking permits, sporting rights, etc.).
• Fixed service charges (e.g. fees for maintaining communal areas, utility charges, etc.).
• Variable service charges (e.g. arranging property repairs).
• ‘Sinking’ funds (e.g. slush fund for emergencies, unexpected structural maintenance, etc.).
• Easements allowing your tenant to use your property in a specific way.
• Sums received for the use of furniture, furnishings, etc.
• Reverse premiums and deemed premiums.
• Property insurance

If you are paid for any services that a landlord does NOT normally provide (e.g. regular laundry services, house cleaning, meals, etc.), this income should be treated separately, as trading income instead of rental income.

Note: you’ll need to consult your tenant if your service charges require your tenant to pay more than £250 for planned work or £100 per year for ongoing work (lasting more than 12 months).

How to calculate tax on rental income

To calculate how much tax you owe on your rental income:

1. First, calculate your net profit or loss:

Rental Income – Allowable Expenses = Rental Profit

2. Second, deduct your personal allowance:

Rental Profit – Personal Allowance = Total Taxable Rental Profit

*If you were born before 6 April 1948 you may be entitled to a bigger Personal Allowance. For more information visit GOV.UK: Income Tax Rates and Allowances.

3. Finally, calculate your tax rate for the current year.

Total Taxable Rental Profit x Income Tax Rate (%) = Tax Owed on Rental Profit

See HMRC’s current income tax bands.

Example:

It is the 2019 – 2020 tax year, and Sarah is a basic rate taxpayer who has made £15,000 in rental income with £2,000 in allowable expenses. How much tax does she owe?

1. £15,000 rental income – £2,000 allowable expenses = £13,000 rental profit
2. £13,000 rental profit – £12,500 personal allowance = £500 total taxable rental profit
3. £500 total taxable rental profit x 20% basic rate income tax = £100 tax due

Sarah therefore owes £100 on her rental profit for the 2019-20 financial year.

Note: Every effort has been made to ensure the above information is correct at the time of this article going online, however, we recommend that you seek professional advice if required.

If you would like to review your commercial property or residential landlord insurance get in touch with the team at Lockyers or give us a call on 01924 278222.