Do I have to pay tax on my rental income?

I have a rental property; do I need to tell HMRC?

If you are receiving rental income from a property that you have rented out then, as you may have already guessed, HMRC will want to know about it and, if there is a profit, they will also want to tax it.

Exception applies to individuals who are non-UK domiciled and are claiming the remittance basis of taxation. More details on this can be found here.

You may not have to pay tax if your rental profits are within the £1,000 property allowance or below the personal allowance. However, HMRC may still ask you to file a tax return and report the income. If you are already filing a tax return (i.e. you meet other criteria for filing a UK tax return) then you must report the income from your rental property.

There have been several updates to how rental profits are calculated (the £1,000 property allowance, restriction to finance costs, and the Replacement of Domestic Items Relief), all of these updates are found in this article.

The reportable income would be the rent you receive per calendar month but it may include services paid by the tenant which would normally be provided by you, as the landlord. For example, the cleaning of communal areas or payment of any utility bills by the tennants. Also, if you hold a deposit, then you must include the amount as income if you do not return it to the tenant at the end of their stay.

What about expenses that I incur whilst renting my property?

These are deductible against your rental income. There are many costs involved with maintaining a property, some of which are allowable and some of which are specifically disallowed. As a general rule, the expense will be allowable if it is “wholly and exclusively” for the purposes of your rental business.

Some common expenses include;

– Repairs and maintenance of property this includes the replacement of furnishings and appliances

– Ground rent

– Insurance

– Service charges

– Letting agent fees

– Management fees

– Advertising costs

– Utility bills (if you pay them) including gas, electric, council tax, water rates etc

– Mortgage interest this is for a mortgage held on the rental property and does not include any capital repayments. These costs are restricted from 6th April 2017. More details can be found here.

– Legal costs associated with getting/repaying a mortgage this is subject to the same restriction as above.

– Administration and incidental costs

It is possible to claim partial expenses if the costs incurred had a dual purpose. For instance, if you pay a combined utility bill for your home and your rental property, you will be able to claim a fair portion of the bill as a rental expense.

Some disallowed expenses include;

– Costs associated with the purchase of the property these are capital expenses* and include the purchase price, legal fees, stamp duty etc.

– Improvements to the property such as, a loft conversion. Again, this is a capital expense

Capital expenses are specifically disallowed as these are associated with the value of the property. They are deductible against the proceeds on the sale of your property.

What if I have made a loss?

If, in any given tax year, your allowable expenses are greater than your rental income, you will have a loss. Losses can only be deducted against other UK rental profits. It is important to note that losses cannot be used to offset employment or other sources of income. Any unused rental losses can be carried forward and offset against rental profit in the future.

But, if you have several rental properties and another has made a profit then this loss is automatically offset against that property. You should note that there are exceptions to this which apply to overseas properties or furnished holiday lettings. You will not be able to offset a UK rental loss against overseas rental profit.

Other details that you may find useful

Rent a room scheme; if you rent out a spare room, or rooms, in your home, then you can receive up to £7,500 per year, tax-free.

Joint ownership; rental properties can of course be owned jointly. By default, the rental income will be split evenly between all parties (i.e. 50/50). However, it is possible to override this default position if the property is owned in unequal shares by completing Form 17, Declaration of Beneficial Interest in Joint Property Income.

UTR; if you have never filed a UK tax return and have started receiving rental income then you will firstly need to register with HMRC to receive your UTR (unique taxpayer reference) and then file your self-assessment tax return.

Non-resident; if you are a non-resident of the UK but have a rental property here you will still need to file a UK tax return. It is worth noting that the personal tax-free allowance (currently £12,570 for 2023/24) will only be allowable for citizen of a European Economic Area or if is included in the double-taxation agreement between the UK and the country you reside in.

I have a US rental property; do I need to file a US tax return?

Mostly likely, yes. You would need to file a Form 1040 and Schedule E to report the profit or loss from your rental business.

The reporting and taxation are broadly similar to the UK in that you must report all the income and deduct any allowable expenses. The profit is then subject to your applicable income tax rates. Losses are also carried forward in similar a fashion however they may be utilised in the year that the rental property is disposed of.

Depreciation; a significant difference to the calculation of rental profits on a US tax return is the ability to claim a portion of any capital expenses as a rental deduction. However, the accumulated depreciation claimed over the rental period is added back to the property on sale. More information on the sale of properties can be found here.

It may also be necessary to file a State tax return. However, each state has its own set of rules and tax rates. Please contact us directly for more information.

Frequently asked questions

If I must report foreign rental income on my UK tax return will I have to pay tax twice?

Generally, no. The UK has a tax treaty with most countries which will determine who has the taxing rights to this income. A credit will be claimed on either return to ensure that tax is not overpaid.

Should I be keeping records?

Yes, always. This would not only be useful for you to prepare your tax return at the end of the year but will also be useful should anything be questioned by HMRC or the IRS.

Are there any special deadlines?

The usual UK and US tax deadlines apply to rental properties as they are a part of your tax return. The UK deadlines can be found here and the US deadlines can be found here.

Please note that this should not be taken as tax advice. The information provided above is general in nature and will not apply to all individuals. If you would like to discuss any points of this article, please contact us directly.