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May 15, 2015

Landlords: Tax Returns, Key Dates, Expenses & Reliefs

Renting out a residential property is a popular way for individuals to increase their annual income, but it is important that responsibilities, such as reporting tax  on rental income to HMRC, are not overlooked.

When you first let your property, you are required to notify HMRC and register for self-assessment by 5 October following the end of tax year in which you started to receive rental income . So if you started collecting lettings income in the 2014/15 tax year, you must inform HMRC by 5 October 2015.

Thereafter, you are required to complete and submit a tax return by 31 January following the tax year in question (or 31 October if submitting a paper return).

Tax will be payable based on your rental profits which includes your lettings income less allowable expenses.

Capital v Revenue Expenditure

There are two types of expenditure which can be incurred in the running of a property: revenue and capital.

Revenue Expenditure

Revenue expenditure is expenditure incurred in the day-to-day running of the property, and rental income is calculated by deducting these allowable expenses from rents receivable. Common allowable expenses include the following:

  • Maintenance and repairs
  • Buildings and contents insurance
  • Rent, ground rent, service charges
  • Interest on the loan used to purchase the property*
  • Utility bills
  • Council tax
  • Legal and professional fees

If you rent out your property furnished, you can also deduct ‘wear and tear allowance’ which accounts for the deterioration of furniture and equipment. This is calculated at a rate of 10% of rent receivable, taking into account deductions for expenditure usually incurred by the tenants (e.g. council tax, water rates).**

Capital Expenditure

In contrast, capital expenditure is expenditure incurred in the replacement of an asset, e.g. a roof, carpets, a door etc. or an improvement to the property, e.g. an extension.

Capital expenditure cannot be deducted from rents receivable, however provided that the enhancement is reflected in the state of the property on disposal, it can be included as a deduction for capital gains tax when the property is eventually sold.

Rent a Room Scheme

If you rent a room or floor in your own home, you can elect for ‘Rent a Room Relief’, enabling you to earn up to £4,250 per year tax-free. This tax exemption is automatic provided that you earn less than this threshold.

If your rental income exceeds the threshold, then you should consider whether your allowable costs are over £4,250 a year, as you still may benefit from the relief.

If your allowable expenses do not exceed £4,250, then it is likely to be beneficial for you to elect for the rent a room relief, as this amount is deducted from your gross rental income. However, if your allowable expenses do exceed £4,250, then you should deduct expenses from your income in the normal way.

It should be noted that the £4,250 allowance is per household, therefore a couple will need to split the allowance between them.

If you would like advice on a rental property or need assistance in completing your tax return, please contact a member of our team.

*From 2017/18 landlords will no longer be able to deduct all of the interest payments when calculating rental profits.

**From 2016/17 landlords will no longer be automatically entitled to wear and tear allowance.

For more information about these changes, please see our article UPDATE: Tax relief cut for landlords.


Contact us today to discuss your tax requirements.
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