Does your tax return include property rental expenses?
One of the most common questions that taxpayers ask is ‘how to work out rental expenses for my tax return’. If you let out a property, you can deduct certain tax allowances and tax expenses from your income. However, the rules are different if the property is used for holiday lets or if it is overseas.
Our 5 step guide will help you work our rental expenses for your tax return.
1. What sort of letting is it?
Firstly, you have to determine what sort of residential let you have. It will normally be:
- Residential letting
- Holiday letting in UK
- Holiday letting overseas
Properties that you let out for people to live in as their home count as ‘residential lettings’. These are the most common sorts of lets and the rent and expenses for these properties are most likely to appear on your tax return.
2. Work out the allowable expenses
The most common tax expenses you can deduct from letting income (except the ‘Rent a Room scheme’ – see below) are:
- Interest on property loans
- Letting agent’s fees
- Building and contents insurance
- Utility bills and council tax
- Property maintenance – e.g. cleaning and gardening
- Repairs to the property (but not improvements)
If your annual income from property lets is less than £68,000 (before you have taken off expenses) you just include the total expenses on your tax return. If it is over £68,000, you will need to provide a breakdown.
3. Make sure you have the right tax year
Make sure that you allocate property tax expenses to the year they apply to. It doesn’t matter when you pay the expenses but it does matter when they occurred. There are times when you may have to allocate part of an expense to one year and part to another.
4. Work out your overall ‘net profit’
Letting residential investment property is treated as a business, even if it is just one property that you let out.
Whether you let one or several properties, you are taxed on the overall ‘net profit’. You work this out by:
- Adding together all your annual rental income
- Adding together all your allowable expenses (as above)
- Deducting the allowable expenses from the income
By working out the income in this way, you can offset a loss from one property against the profit from others. Your net profit counts as part of your overall taxable income.
5. The ‘Rent a Room’ scheme
If you are letting furnished accommodation in your own home to a lodger and your total receipts (rent plus income from meals, laundry service, etc) are £4,250 or below (£2,125 if letting jointly), you are able to earn this income tax-free under the ‘Rent a Room’ scheme.
You will pay income tax on anything you earn over £4,250.