06 Feb
A guide to renting out as a Landlord
A comprehensive guide for landlords explaining their duties and responsibilities
An individual will be renting out as a landlord if he/she is letting a property. Being a landlord comes with a lot of responsibilities such as:
- They are responsible for keeping their properties safe and free from health hazards.
- They should ensure safe instalment and maintenance of electrical and gas equipment.
- They should ensure the protection of their tenants’ deposits in a government-approved scheme
- If in England, they should ensure whether the tenant has the rights to rent your property
- They should provide their tenants with a copy checklist of ‘how to rent’ as soon as they rent your property
- They should ensure the provision of an Energy Performance Certificate for the property
Financial responsibilities as a landlord
Renting out as a landlord, you are liable to pay
- Income tax (on the rental income you earn, exclusive of the daily running cost of the property)
- Class 2 National Insurance (If the letting work you do on properties counts as running a business)
Remember:
- You are liable to pay tax, whenever you let a property in England and wales.
- Same tax rules are also applicable in Scotland and Northern Ireland
When you run a property business
If your activities count as running a business, and you are generating profits that exceed £ 5965 per annum through this business, then you are liable to pay Class 2 National Insurance if all of the following apply:
- Your main job is to be the landlord
- You are letting out multiple properties
- You are buying new properties for the purpose of letting
However, if your profits project lower than £ 5965, then you can pay voluntary Class 2 National Insurance, for instance, to ensure you get the full state pension.
If your activities do not count as running a business, then you are not liable to pay any National Insurance. Even if your work revolves around making arrangements for repairing, tenant advertising and managing tenancy agreements.
When you personally own a property
You can enjoy property allowance on the first £ 1000 earned through rental income, no taxes will be charged
You can contact HM Revenue and customs if your rental income is ranging between £1000 and £ 2500 per annum
You are liable to report it on your self-assessment tax return if:
- It is between 2500 to 9999 after deducting allowable expenses
- It is at least 10,000 before deducting allowable expenses
You have to register by the 5th of October after the tax year in which you had a rental income if you do not submit your tax returns usually.
If you are unsure about the process, a competitive tax accountant or personal tax accountant should be able to help you register and submit the relevant documentation required.
Declaration of unpaid taxes
Unpaid tax can be declared by informing HMRC about your rental income from previous years. You’ll be charged a lower penalty if you personally inform HMRC rather than HMRC finding it themselves, which can lead to a higher penalty.
You’ll have 3 months to work out in order to pay for what you owe, after the provision of the disclosure reference number.
You should not include the property allowance (1000) for tax years from 2017 to 2018.
If you think you have undeclared income speak to an expert accountant or tax accountant to get advice before speaking to HMRC.
Company’s property rental income
Rental income should be calculated in the same manner as you calculate your business income.
Costs you may claim for reduction of tax
Different types of tax rules are applicable to:
- Residential properties
- Commercial properties
- Furnished holiday lettings
Residential properties:
The tax must be paid by you or your firm on the profits earned by letting out the property after deductions have been made for allowable expenses.
Allowable expenses are the expenses incurred on things you need on a daily basis to run the property, for instance:
- Payment (Fees) to letting agents
- Legal fees that are charged for rents of a year or less, or for renewal of the lease for less than 50 years
- Accountants’ fees
- Interest paid on property loans
- Property maintenance and repairs (does not include any improvements made)
- Council tax
- Payment for services like for cleaning and gardening
- Rent, ground rent and service charges
- Utility bills ( for instance electricity, water and gas)
- Other direct costs that are associated with renting the property, for instance, phone calls and advertising
- Buildings and content insurance
Capital expenditures, such as the purchase of property or renovation of a property beyond the repairs for wear and tear, do not count as allowable expenses.
Replacement of domestic items relief is a tax relief that can be claimed on expenses that are incurred in replacing a ‘domestic item’.
The domestic items may include:
- Sofas
- Curtains
- Beds
- Carpets
- Fridges
- Crockery and cutlery
Keep in mind that the domestic item you bought must be only used by tenants in residential property and the replaced domestic item should no longer be used in that residential property.
Availability of ‘replacement of domestic items relief’ for:
Individuals and partnerships: From the 2016-2017 tax year
Companies: From 1 April 2016
What can be claimed on Furnished residential lettings?
‘Wear and tear allowance’ can be claimed by:
Individuals and partnerships: for the 2015-2016 tax year
Companies: On or before 31 March 2016
Video: Landlord Responsibilities, Duties & Obligations
Landlords are in a position of responsibility. Their duties involve much more than just collecting rent. Watch this video to get a complete overview of how it works.
What can be claimed on furnished holiday lettings?
Allowances can be claimed on furnished holiday homes. You can claim
- Plant and Machinery capital allowances on equipment used inside the property like furniture, furnishings and equipment used outside the property like vans and tools
- Capital gains tax relief:
- Business Asset Rollover relief
- Entrepreneurs’ relief
- Relief for gifts of business assets
- Relief for the loan given to traders
Your eligibility to make the above claims depends upon the following conditions:
- You are charging rates according to the market value of the properties in the vicinity
- You let the property for 150 days or more per annum
- The property is offered to be rented out for at least 210 days per annum
- No single rent is more than 31 days
If the property is owned personally by you then the profits you earn may count as earnings for pension purposes.
You should seek professional advice from competitive tax accountants, property accountants or an expert online accountant before trying to claim the various reliefs mentioned above.
What can you claim if you let a Commercial property?
Plant and machinery capital allowances can be claimed on some items if you let out a commercial property, for instance, shop, garage or lock-up
Estimating your profit
You can calculate the net profit or loss for all of your property lettings by treating it as a single business, furnished holiday lettings are excluded. You do this, by:
- Summing up all of your rental incomes
- Summing up all of your allowable expenses
- Taking out expenses from the income
To ensure you are only claiming for tax benefits for eligible properties, estimate the profit or loss from furnished holiday lettings from any other rental business.
Loss-making
Write down the amount on your self-assessment form after deducting losses, if any, from your profit.
You may balance your losses against:
- Future profits, by carrying them forward to any incoming year
- Profits, that are being generated from other properties (If you have).
Losses can only be balanced against future profits, if in the same business.
Clear House Accountants are specialist Accountants in London, who have trained a highly competitive team of property accountants. Our specialised accountants have been working with clients from the property industry for many years and have been able to help them create smart tax saving solutions for their complicated tax problems. Speak to us to learn more.