You’ve let out a house for years, but your total income has always been less than your tax allowance so you haven’t declared it to HMRC. Will you need to reconsider in view of the impending major changes to the tax rules for landlords?
The nature of this question is a bit obscure and I wonder whether you mean your total income from letting out the property, or your total overall income. In any case, you should be clear that you are obliged to declare all income by the end of the tax year, unless your only source of income is from your main job, and you are taxed at source via PAYE.
Tax on rental income from a property you own personally
The rules have recently changed and you are obliged to contact HMRC to let them know you are renting out a property, even if your income from property rental is less than £2,500 a year.
Then you are obliged to report it on a Self Assessment tax return if you earn:
- £2,500 to £9,999 after allowable expenses
- £10,000 or more before allowable expenses
If you have not usually filed a tax return, you need to register by 5 October following the tax year in which the rental income was received.
Do not forget that tax relief for landlords changed in the 2015, and so you should check that this has had no affect on the income you earn from your rental property, because it changes the amount of tax landlords can reclaim as relief. Relief will be capped at the basic rate of tax over a four-year introduction period beginning in 2017, whether taxed at the basic or higher rate of tax.
This means that the relief for finance costs will be restricted to the basic rate of income tax as of 6 April 2017, including for mortgage interest, interest on loans to buy furnishings, and fees incurred when taking out, or repaying a mortgage or loan.
You cannot any longer deduct all of your costs to arrive at the profit from letting out your property; instead, landlords receive a basic rate reduction from their income tax liability. Here is how the scheme is being introduced gradually:
- 2017/18: the deduction from property income (as currently allowed) will be restricted to 75% of finance costs with the remaining 25% available as a basic-rate tax reduction.
- 2018/19: further change to 50% finance costs deduction and 50% given as a basic-rate tax reduction.
- 2019/20: another change to 25% finance costs deduction and 75% given as a basic-rate tax deduction.
- 2020/21: all financing costs incurred by the landlord are at basic-rate tax deduction.
You must pay tax on the profit you make from renting out the property after deductions for “allowable expenses”. These are decided under the wholly and exclusively rules that guide all expenses against tax, and including:
- Letting agents’ fees
- Legal fees for lets of twelve months or less, or for renewing a lease for less than 50 years
- Accountant’s fees
- Buildings and contents insurance
- Interest on property loans
- Maintenance and repairs to the property (but not improvements)
- Utility bills, i.e. gas, water, and electricity
- Rent, ground rent, service charges
- Council tax
- Services, such as cleaning or gardening
- Other direct costs of letting the property, like phone calls, stationery, and advertising
Capital expenditure, allowable expenses, relief, and allowances
“Capital expenditure” is not the same as “allowable expenses”; and “replacement of domestic items relief” (note, only from 6 April 2016), and “wear and Tear allowance” are two other means to account for expenses in slightly different ways.
- “Capital expenditure” includes buying a property or renovating it, but does not include “wear and tear expenses”.
- Claiming tax relief for replacing a “domestic item”, under the rule “replacement of domestic items relief”, includes replacing a bed, sofa, carpet, curtains, white goods, crockery and cutlery, but when buying them new, they must go under “Capital expenditure”.
- Note also that you must have bought any items you put through as expenses for the sole use of the tenants in your property and that any item replaced cannot any longer be used at the property.
- You may also be able to claim “wear and tear allowance”, but only if the property is fully furnished.
HMRC are cracking down hard on all taxpayers who fail to disclose income. They seem particularly keen to make sure landlords are on the straight and narrow, rolling out the “Second income campaign”, as well as using their powers to search all records on any person they suspect of tax evasion to the full. HMRC’s powers to snoop include checking with the land registry, requesting bank statements directly from your bank, looking into credit card transactions, and so on. It is in the interests of everyone to keep accurate records, therefore, whether or not they make a profit from renting out a property; and especially if they let out property and have income from other sources as well. Quite honestly, an accountant specialist in property tax and accounting will make your life easier and ensure compliance – always, probably saving you money in tax, but definitely saving you money in fines and penalties that could result from not declaring all your income, including that from rental property.