Rental income is the rent you get from your tenants. This includes any payments for:
- The use of furniture
- Charges for additional services you provide such as:
- Cleaning of communal areas
- Hot water
- Repairs to the property
Paying tax on profit from renting out your property
You must pay tax on any profit you make from renting out property. How much you pay depends on:
- How much profit do you make
- Your circumstances
Your profit is the amount left once you’ve added together your rental income and taken away the expenses or allowances you can claim.
If you rent out more than one property, the profits and losses from those properties are added together to arrive at one figure of profit or loss for your property business. However, profits and losses from overseas properties must be kept separate from properties in the UK.
There are different rules if you’re:
- Renting a room in your home
- Letting a property as a furnished holiday letting
- Renting out foreign property
- Letting a property in the UK while you live abroad
Types of property ownership
You can share ownership of rental property with other people and the amount of rental income on which you will pay tax will depend on your share of the property. Your share of a jointly owned property business is not a separate business from any properties you may own yourself.
Property jointly owned with a spouse or civil partner
Property jointly owned by married couples and civil partners who live together will usually be taxed in equal shares.
If you own the property in unequal shares and are entitled to the income in the same unequal shares, the income can be taxed on that basis. You both need to declare beneficial interests in joint property and income.
Property jointly owned but not with a spouse or civil partner
If you own a property jointly with another person who is not your spouse or civil partner your share of the rental profits or losses will usually be based on the share of the property you own unless you agree to a different allocation.
You’ll have to keep accurate records of rent received and your expenses incurred to work out the profit you’ll pay tax on.
Your records must separate your income from fully-furnished lettings and unfurnished or part-furnished lettings.
The records you should keep could include:
- Rent books
- Bank statements
- Mileage logs (for journeys that are solely for your property business purposes)
You must keep your records for at least 5 years after the 31 January tax return deadline for each tax year.
HMRC can charge you a penalty if your records are not accurate, complete, and readable or if you do not keep them for the required period.
You may also have to pay a penalty if you submit an inaccurate tax return. We may check your records to make sure you’re paying the right amount of tax.
Cash basis accounting
Cash basis accounting is a simpler way of working out taxable profits for businesses with straightforward tax affairs.
If you have income from a property business you’ll be able to use ‘cash basis’ rather than standard accounting to work out your taxable profits.
If you meet the criteria but do not want to use the cash basis and prefer to use standard accounting methods you must check the box on your return to opt out of the cash basis.
Changes to tax relief for residential property
From 6 April 2020 Income Tax relief on all residential property finance costs is restricted to the basic rate of income tax.
Who is affected
You are affected if you’re:
- An individual UK resident who lets residential properties in the UK or overseas
- An individual non-UK resident who lets residential properties in the UK
- An individual who lets residential properties in partnership
- A trustee or beneficiary of trusts liable for Income Tax on residential property profits
All residential landlords with finance costs are affected, but only some will pay more tax.
Who is not affectedYou will not be affected by the finance cost restriction if you’re a:
- UK resident company
- Non-UK resident companies
- The landlord of Furnished Holiday Lettings
You’ll continue to receive relief for interest and other finance costs in the usual way.
Finance costs restricted
Finance costs restricted include interest on:
- Loans - including loans to buy furnishings
Other costs affected are:
- Alternative finance returns
- Fees and any other incidental costs for getting or repaying mortgages and loans
- Discounts, premiums, and disguised interest
If you take a loan for both residential and commercial properties, you’ll need to use a reasonable apportionment of the interest to work out your finance costs for the residential properties, as only the residential properties' finance costs are restricted.
This also applies if your loan was partly for a self-employed trade and partly for residential property...
You can deduct expenses from your rental income when you work out your taxable rental profit as long as they are wholly and exclusively to rent out the property.
Find examples of expenses incurred wholly and exclusively for the property rental business.
You can also claim expenses for the interest on a mortgage to buy a non-residential let property.
Other types of expenses you can deduct if you pay for them yourself are:
- General maintenance and repairs to the property, but not improvements (such as replacing a laminate kitchen worktop with a granite worktop)
- Water rates, council tax, gas, and electricity
- Insurance, such as landlords’ policies for buildings, contents, and public liability
- Costs of services, including the wages of gardeners and cleaners
- Letting agent fees and management fees
- Legal fees for lets of a year or less, or for renewing a lease for less than 50 years
- Accountant’s fees
- Rents (if you’re sub-letting), ground rents, and service charges
- Direct costs such as phone calls, stationery, and advertising for new tenants
- Vehicle running costs (only the proportion used for your rental business) including mileage rate deductions for business motoring costs
Expenses you cannot claim a deduction for include:
- The full amount of your mortgage payment - only the interest element of your mortgage payment can be offset against your income
- Private telephone calls - you can only claim for the cost of calls relating to your property rental business
- Clothing - for example, if you bought a suit to wear to a meeting relating to your property rental business, you cannot claim for the cost as wearing the suit is partly for your rental business and partly to keep you warm - no identifiable part is for your property rental business
- Personal expenses - you cannot claim for any expense that was not incurred solely for your property rental business
Allowable expenses do not include ‘capital expenditure’, such as buying a property.
Claiming part expenses
Where only part of an expense is for your property rental business, you can deduct that part as long as it’s wholly and exclusively for the property business.
Increasing your mortgage
If you increase your mortgage loan on your buy-to-let property you may be able to treat interest on the additional loan as a revenue expense or get relief against income tax as long as the additional loan is wholly and exclusively for the letting business.
Interest on any additional borrowing above the capital value of the property when it was brought into your letting business is not tax deductible.
If the mortgage is for a residential property then the restrictions on interest from April 2017 will apply.
Maintenance and repairs costs
Allowable expenses include the costs of maintenance and repairs to the property (but not ‘capital’ improvements).
A repair restores an asset to its original condition, sometimes by replacing parts of it.
Property repairs can include:
- Replacing roof tiles blown off by a storm
- Replacing a broken-down boiler
- Redecoration between tenants to restore the property to its original condition
Replacing a part of the property with the nearest modern equivalent is still a repair if the improvement is incidental to the repair, such as replacing a single-glazed window with a double-glazed window. Check examples of typical maintenance and repair costs.
If you have an insurance policy that covers the cost of some repairs to your property, you can only claim the additional expenses that you incurred for repairs that the insurance payout did not cover.
This also applies if you keep your tenant’s deposit from a Tenancy Deposit Scheme to cover damages they’ve caused to the property. You can only claim expenses incurred for repairs over the amount of the deposit that you kept.
You cannot claim the costs for replacing furnishings or equipment on a property. These are not allowable as costs of maintenance and repairs, but from 6 April 2016, they may qualify for Replacement Domestic Items relief.
The costs of renewing fixtures such as baths, washbasins, or toilets are normally allowable as they are considered repairs to the building, as long as they are a like-for-like replacement and not an improvement.
The cost of replacing small items, such as cutlery, crockery, cushions, bed linen, and similar is also allowable. To qualify the items to have to be:
- Of low value
- Have a short useful life
- Need to be replaced regularly (almost annually)
You can claim the property allowance and get up to £1,000 a year of tax-free property income.
If you claim the property allowance you cannot claim a deduction for your expenses.
Allowances for replacement of domestic items
If you let out the residential property (a dwelling house) you may be able to claim a deduction for the cost of replacing domestic items such as:
- Movable furniture for example beds, free-standing wardrobes
- Furnishings for example curtains, linens, carpets, floor coverings
- Household appliances for example televisions, fridges, freezers
- Kitchenware for example crockery, cutlery
Replacement of domestic items relief is only available for expenses incurred from 6 April 2016 for Income Tax purposes.
You can claim this relief when:
- You carry on a property business that includes the letting of a dwelling-houses
- An old domestic item provided for use in the dwelling-house is replaced with the purchase of a new domestic item and:
- It’s provided for the exclusive use of the lessee in that dwelling-house
- The old item must no longer be available for use by the lessee
- The expenditure on the new item must not be prohibited by the wholly and exclusive rule but would otherwise be prohibited by the capital expenditure rule
- Capital allowances must not have been claimed for the expenditure on the new domestic item
You cannot claim this relief:
- If you replace a domestic item in a property that qualifies as a Furnished Holiday Let - you will continue to be able to claim capital allowances on these items
- If you use the Rent a-Room Scheme
- For the initial cost of buying domestic items for a dwelling house
Replacement of domestic items relief can be claimed for dwelling houses that are:
- Part furnished
- Fully furnished
When the new item is an improvement on the old asset
If the new item is an improvement on the old item, for example replacing a sofa with a sofa bed, you can only claim a deduction for the cost of buying an item the same as the original. For example, if a new sofa costs £400 but a sofa bed costs £550, you can only claim the £400 as a deduction and no relief is available for the £150.
A new item is an improvement when:
- It’s not the same or substantially the same as the old item
- The functionality has changed (for example from a sofa to a sofa bed)
- You upgrade the quality or material of the item (for example you upgrade from synthetic fabric carpets to woolen carpets)
If the replacement item is a reasonable modern equivalent, for example, a fridge with an improved energy efficiency rating compared to the old fridge, this is not an improvement and the full cost of the new item is eligible for relief.
How to work out the amount of deduction
When you replace domestic items, you may sell or part exchange the old item. This may result in incidental costs of disposing of the old item or buying the new item.
To work out the allowable deduction for the new item you should:
Add together the cost of the new replacement item* and any incidental costs for disposing of the old item or buying the replacement.
Deduct any amounts received on disposal of the old item.
*the cost of an equivalent item if it is an improvement on the old item.
Expenses are ‘capital expenses’ if they will be used in the business over a longer period, such as when you:
- Add something to the property that was not there before
- Alter, improve or upgrade something that was existing
- Include the purchase of furnishings and equipment for the property
Capital expenses are not allowable and cannot be claimed against your rental income but you should keep records of them as you might be able to set them against Capital Gains Tax if you sell the property in the future.
Examples of capital expenses that would not normally be allowable:
- Adding an extension
- Installing a security system if there was not one before
- Replacing a kitchen with one of a higher specification
If you carry out work on a property before leasing or renting
Some costs of work on a property before you lease or rent it will be capital expenses, and therefore not allowable expenses. This includes if you buy a property in a derelict or run-down state, and either you paid a substantially reduced price for it or it was not in a fit state for rental.
Any works done to put it back into a fit state for letting are unlikely to be repair works. They will be capital works as they will improve the property. The costs for these works will not be an allowable expense.
How to work out your taxable profits
To work out your profit or loss you should treat all receipts and expenses as one business even if you’ve more than one UK property by:
- Adding together all your rental income
- Adding together all your allowable expenses
- Take the expenses away from the income
The rate of tax you pay depends on your total income for the year, from employment, self-employment, or pensions and any allowances you can claim. Read more information on paying income tax).
How to report your taxable profits
You must contact HMRC if you have taxable profits from the property you rent.
If you have not told us about your property rental, you need to do so by 5 October following the tax year you had taxable rental profits.
If you’re also employed and your rental profits are small enough, you can ask us to deal with your profits by adjusting your PAYE code.
You must report your profits on a Self Assessment tax return if we ask you to. We’re likely to do this if your income is:
- More than £2,500 after allowable expenses
- £10,000 or more before allowable expenses
Whether you need to fill in a tax return will depend on:
- The total rent you get and the profit you make
- Any other income you’ve had or may get, for example, from employment or pensions
If we ask you to send a tax return you must give details of your rental income and expenses for the tax year even if you have no tax to pay.
If you have had property income you’ve not told us about, use the let property campaign.
If you’re not registered for Self Assessment
If you do not usually send a tax return, you need to register for Self Assessment by 5 October following the tax year you had rental income. If you do not, you could be charged a penalty.
There are different ways to register if you’re:
- Self-employed or a sole trader
- Not self-employed
- A member of a partnership
You should allow enough time to complete the registration process so you can send your return by the deadline.
If the allowable expenses are more than your rental income you will make a loss. Normally you can only offset that loss against any profits that arise from the same rental business in future years.
If more than one property is being let out, the income and expenditure from all properties should be added together to work out an overall profit or loss for the year. This means that expenses for one property can be offset against income from another property. If there is a loss from one property it’s automatically offset against the profits from another.
You can only get relief for losses when the loss arises from commercial letting. If you let out a property on terms that are not commercial, such as to a friend or a relative for reduced rent, expenses incurred can only be deducted up to the amount of the rent received for that property.
This means you do not make a profit or a loss.
You cannot use any excess expenses in a later tax year, even after you start charging commercial rent in that tax year. Find an example of an uncommercial let.
How to report losses
If HMRC asks you to send a tax return you need to give details of your rental income and expenses even if you have made a loss in the year.
If you stop renting the property
When your rental business ends, any losses that have been carried forward are usually lost as they cannot be set against any other income.
You may be able to claim earlier property losses against any profits from the new property. This applies if you continue with the same property business and start to rent again within 3 years. This depends on the circumstances of each case.
You may have to pay Capital Gains Tax if you make a profit when you sell property that’s not your home.