How much tax does a residential landlord pay?
The amount of tax paid by a landlord depends on the way in which the property is being rented, how much rent is collected annually, and the amount of “allowable expenses” encountered. If you have a house or apartment and would like to rent out one of your furnished rooms, you can do so tax free through the Rent a Room scheme, as long as the annual amount you receive in rent does not exceed £4,250 (or £2,125 if you let jointly). The Rent a Room scheme is available to both homeowners and leaseholders, although those renting should check that their lease allows them to take a lodger. To be eligible for the Rent a Room scheme, you/your family should live in the property most of the time, and the rented area of your house should not be converted into an autonomous apartment.
Landlords who rent one or more properties will need to add up all the profit from property letting(s) for the year in order to calculate taxable income. Residential letting is considered a single business no matter how many properties you rent out. Therefore, if you rent out several properties and encounter losses from renting one of them, you can apply these against your income from other properties. After you come up with your taxable income, you should also add up all of your “allowable expenses”. These costs are those incurred solely for the purpose of renting out a property, and typically do not include capital expenditure. They may include the following:
- Agent fees
- Any legal fees associated with signing or renewing a lease
- Accounting fees
- Landlord insurance
- Interest on mortgages
- Property maintenance and repair costs
- Utility bills (water, gas and electricity)
- Ground rent
- Council tax
- Domestic services (for example gardening)
- Any other costs directly associated with renting out a property
Once you add up both income and allowable expenses, you should subtract the latter from the former, which will give you your net income. From this, you can also deduct one of two allowances: “wear and tear” or “renewals” allowance (cost of replacing old equipment). Finally, you should add the taxable profit from residential property lettings to your overall income for the year. If that amount is above your allowances, you will pay tax at standard income tax rates. Note that if your income from renting a property is higher than £70,000 you need to declare it on your tax return together with all of the allowable expenses independently.