A self-assessment tax return for a landlord is a process by which rental income is reported. Income tax due is calculated for HMRC. This is mandatory for any landlord who rents out a property, with penalties being applied if they fail to submit their tax return or pay income tax on time. But how is a self-assessment tax return filled out?
In this article, Real Business will cover how to fill out a self-assessment rental income tax return, calculate how much tax is owed, make considerations for a landlord with more than one property and more. Read on for more information.
How To Fill Out A Landlord’s Self-Assessment Tax Return?
Below is a step-by-step guide for registration.
Register For Self-Assessment
Before you file your tax return, you need to be registered with HMRC if you aren’t already.
- Registration – Go to the HMRC Website and register as a landlord, providing personal details and information on your rental income.
- Receive your Unique Taxpayer Reference – You will be issued a 10-digit UTR number, needed for all your tax filings.
Gather Necessary Documentation
Collect all relevant documentation for your self-assessment tax return:
- Rental Income records – Rent received, deposits retained and any other income derived from the property should be listed here.
- Expenses incurred – Gather receipts and invoices for all allowable expenses. These can be repairs, maintenance, insurance etc. Mortgage interest is subject to current tax relief rules.
- Financial statements – Bank statements, mortgage statements etc.
Start Your Tax Return
Log in to your government gateway user ID to begin filing your tax return for the relevant tax year. Navigate to the self-assessment section, then start your tax return, selecting “property” to declare your rental income.
- Input your rental income – Enter the total amount of rental income received during a tax year.
- Input other property income – Additional income, such as fees for services provided to tenants (like replacing a key).
Enter Allowable Expenses
An allowable expense is a fee that is deducted to make a company’s costs more manageable. Those that qualify as allowable for tax purposes should also be listed within the return when prompted. The most common types of allowable expenses for UK landlords are:
- Repairs and maintenance – Costs for repairs and maintenance of the property regardless of how vital they are for function. For example, repairing windows, boilers or even painting.
- Insurance – You can claim relief on the cost of residential property finance costs, such as building and contents insurance.
- Letting agent fees – If you use a letting agent to manage the property, you can claim back the fees you pay for their services, including tenant-finding fees, ongoing management etc.
- Legal fees – Legal fees related to letting your property, such as drafting tenancy agreements and evictions, are also deductible – but only with regards to letting the property. Any legal fees that come about regarding its purchase are not eligible.
- Utility – Utility costs, like electric, water and gas, are deductible.
- Mortgage interest – Mortgage interest relief allows the landlord to receive tax credits equal to 20% of their mortgage interest payments. Whilst not a deduction from your rental income, you can still benefit greatly from the tax credit. Furthermore, any fees for arranging a loan/mortgage for your rental property can be deducted.
- Service charges – Owning a leasehold property means you can pay ground rent to the freeholder. Charges for upkeep of communal areas, too, are deducted if they are in direct relation to the property.
- Administrative fees – Accountancy fees to help with your rental property’s financial management and tax return are also deductible, and supplies you buy for your office – so long as they’re involved with managing the property.
- Travel expenses – Mileage and travel costs are also deductible, so long as the travel is done in service of the property (such as travelling to and from the property for work-related reasons).
- Council tax and other bills – If you’re responsible for council tax and other local taxes, such as business rates for holiday lettings, you can deduct them from the bill.
System Calculation
The good thing about doing your self-assessment tax return online is the fact that it automatically calculates your taxable profits. This takes the busy work out of it, allowing you to streamline your self-assessment.
How Is Rental Income Tax Calculated?
Rental income is the earnings you gain from renting out property, covering rent payments, service fees and other income. After you deduct your allowable expenses from the upkeep and management of your property, such as repairs etc, apply the property allowance if applicable. This means that if your property income is low, you can deduct a flat £1,000 from your rental income instead of calculating all your expenses.
The online process does the calculation for you. Nonetheless, the calculation is as follows:
- Calculate taxable rental income – Your allowable expenses must be subtracted from your total rental income. This is your taxable rental income.
- Add to other income – Other income you receive must be added to the taxable rental income, such as via employment, investments etc. This determines your overall taxable income for the year.
- Apply tax – Apply the tax rates. The following are the guidelines by which you pay UK tax:
- Personal allowance – The first £12,570 is tax-free, assuming no other reductions apply to you specifically.
- Basic rate – You pay a tax of 20% when earning between £12,571 and £50,270.
- Higher rate – You pay a tax of 40% when earning between £50,271 and £125,140.
- Additional rate – Income over £125,140 is taxed at 45%.
- Pay NI contributions – Any NI contributions you owe via class 2 or class 4 NICs will need to be paid.
Self-Assessment For Landlords With Multiple Properties
For landlords that have multiple properties, you have to pay extra attention to how you fill out your tax returns. The following is a quick guide on how to manage this:
- Combine income from rent and expenses – All income from the multiple properties should be combined, and all expenses should be included.
- Separate property profit/loss calculation – Calculate the profit or loss of each property individually, meaning you should subtract allowable expenses from the income of each property. Combine the results for accurate taxable rental profits.
- Handle losses – If expenses override your income for any one property, use that loss to offset profits from other properties. This will allow you to lower your tax liability. If the rental business overall is operating at a loss, we recommend carrying these losses forward to offset against future profits.
- Record keeping – For each property you have, keep an accurate record of your income and expenses. Report each property separately on the self-assessment tax return through the specific sections given via the HMRC website.
- Plan taxes – If you have mortgages on several properties, your mortgage interest relief is provided as a tax credit rather than a deductible expense. Depending on the size of your property portfolio, consider incorporating your rental business and operating as a limited company. This can offer great tax advantages, especially as you earn higher income. This is because corporation tax offers a consistent rate, unlike the 40% plus that personal income tax can rise to.
Handling Capital Expenditure And Capital Allowances With Multiple Properties
Landlords may need to make significant investments in their rental properties for various reasons, whether that be to follow new regulations or to simply upgrade facilities within. These investments can be classified as capital expenses, much different from regular maintenance costs.
Capital expenditure refers to high expenses incurred to improve or upgrade the property, such as extensions or renovations. The difference between this and maintenance that makes it worthy of its tax benefits is the fact that these changes being made are added to the property value.
What Are The Tax Benefits Of Capital Expenses?
Capital expenditure is not deductible from rent income right away. Instead, it is to be added to the property’s cost basis so it can be offset against capital gains when the property is sold, meaning it doesn’t reduce your rental profits in the year it was executed.
What Are Capital Allowances?
Capital allowances allow deductions off the cost of certain capital items, such as furniture, equipment etc. against your rental income, but only against certain types of properties. For example, furnished holiday lettings. These types of properties are treated differently from the standard buy-to-let property, needing to be available for at least 210 days a year, and let it out for at least 105 days.
You cannot claim depreciation as an expense. That being said, you can provide tax relief on the depreciation of assets within a property. An example of this is, if you spend £5,000 on new furniture for your furnished holiday lettings, you must claim the amount as capital allowance. This reduces your taxable income for the year.
It’s important to strategically plan your capital expenditures and understand when and how to claim allowances. Minimising tax liability is, in effect, minimising expenses – which is part of Business 101.
Reporting Capital Expenditure On Tax Returns
On your self-assessment tax return, capital expenditure cannot be listed under allowable expenses. Record it separately when calculating capital gains upon the sale of a property. Ensure you keep detailed records of these expenditures, as always.
Conclusion
Overall, understanding how to fill out your self-assessment tax return seems daunting, but it is highly simplified when taking the online portal. Furthermore, it allows you an overview of your overall progress from the year, providing a great understanding of your strengths and weaknesses.
FAQ: Why do landlords need a self-assessment tax return?
A self-assessment tax return is required to be filled out by the following people:
- Self-Employed Individuals – Those who work for themselves, including freelancers and sole traders.
- Company Directors – If you are a director of a company, and your income is not taxed through PAYE.
- Individuals with Untaxed Income – This includes income from renting out property, dividends, savings, and investments, or any other untaxed income.
- High Earners – Individuals who earn over £100,000 per year.
- Partners in a Business Partnership – If you are a partner in a business partnership, you are required to file a return.
- Individuals Claiming Tax Relief – If you need to claim tax relief on pension contributions or other allowable expenses.
- Those with Foreign Income – If you have income or gains from outside the UK that are taxable in the UK.
- Trustees – Trustees of trusts or registered pension schemes.
- Individuals with Capital Gains – If you have made a profit from selling assets like shares or property, and need to pay Capital Gains Tax.
- Recipients of Child Benefit – If you or your partner receive Child Benefit and your income is over £50,000, you may need to file a return due to the High-Income Child Benefit Charge.
- Individuals with Income from Savings – If your savings or investment income exceeds a certain threshold and is not taxed at source.
- Income from the deceased – If you are receiving income from the estate of a deceased person during the administration period.
FAQ: Can I claim expenses for advertising my rental property?
Yes. Advertising expenses are considered necessary for finding tenants in the eyes of the government. The following are the types of advertisements covered:
- Online listing – rental platforms like Zoopla, Rightmove etc.
- Print advertising – Expenses for advertising within newspapers, magazines and publications.
- Signage – Costs for physical signs advertising your property.
- Agency fees – If you pay a letting agent to market your property.
Ensure that all advertisements claimed as expenses are only claimed if they are specifically for the property. Otherwise, they will be considered illegitimate. It’s not a hanging offence to make a mistake, but you may face minor penalties for the inaccuracies, such as interest on unpaid tax.
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