UK Property Taxation

If you live or work abroad while owning and letting property in the UK. We are here to help you with the complexities of filing a UK tax return.

What is Rental Income?

In the constantly evolving property market, understanding rental income and all the intricate facets surrounding it, is essential for UK landlords. Although the tax system can seem complex, having the correct information empowers you to stay compliant and optimise your finances. Read along to gain a better understanding of the UK rental market.

Rental income encompasses rent payments, additional fees, and non-refundable deposits from letting properties. Landlords must declare all rental income but can deduct allowable expenses—such as maintenance, utility bills, insurance, and letting agent fees—to calculate their taxable profit.

The first £1,000 of rental income is tax-free under the property income allowance (PIA), with any amount above this taxed according to the individual’s income tax band, ranging from 0% to 45%. However, not everyone qualifies for this deductible. However, PIA is only intended for landlords with smaller rental incomes. Should your total rental income exceed £1,000 or you have other income sources, the PIA may not apply, and you must report and tax all rental income accordingly.

Rental income should be reported on a self-assessment tax return, and accurate record-keeping and expense claims are essential for tax compliance. Rental profits are taxed similarly to employment or business income, based on total earnings.

Understanding your tax bracket

To determine your tax bracket, subtract any allowances or expenses from your revenue. If your income is below the basic threshold of £12,570, you would not have to pay any tax.

Find out which tax bracket you fall into and view the current 2024/25 Income Tax rates below.

Rental Expenses

pexels-karolina-grabowska-4959926_edited

Navigating rental income taxes can be complex, but understanding allowable expenses can help you maximize your take-home income.

Allowable rental expenses

There are several ways to lower one’s rental income tax which will ensure maximum take-home income. To reduce your rental income tax, ensure you claim allowable expenses, which includes:

Repairs and maintenance of the property

Utility bills (water or electricity)

Council tax

Insurance (building, contents or public liability)

Service costs (gardeners or cleaners)

Letting agent and property management fees

Legal fees for short-term leases or leases under 50 years

Accounting fees

Rents, ground rents and service charges

Direct costs (phone calls, stationery or advertising)

Vehicle running costs for rental business use, including mileage deductions

Mortgage interest paid (claim a tax credit of 20% on interest paid)

Other UK tax relief strategies include:

Rent-a-Room scheme: You can earn up to £7,500 a year tax-free by renting out a furnished room in your home. If you share this income, the limit is halved. If your earnings exceed £7,500, you must complete a property tax return and decide whether to join the scheme or report income and expenses directly.

Furnished Holiday Lettings (FHL): Special rules apply to properties let out on a short-term or seasonal basis to tourists and visitors. Please note that the FHL will be terminated from 6 April 2025 whereafter it will be treated as residential let property.

Property Income Allowance: The PIA offers tax relief of up to £1,000 per year for individuals with modest property income, simplifying tax reporting. Eligible landlords who declare their property income to HMRC can either use this straightforward £1,000 tax-free allowance or deduct actual expenses if it results in a lower tax liability. If rental income exceeds £1,000, the allowance can be deducted from the total income before calculating tax. The PIA is aimed at reducing administrative burdens for landlords with smaller rental incomes, though it may not apply if rental income is higher or if there are additional income sources.

Buy-to-Let tax relief: Landlords can claim a tax credit of 20% on mortgage interest payments. For example, if you pay £10,000 in mortgage interest, you can receive a £2,000 tax credit, which reduces your tax bill accordingly.

Non-deductible costs from rental income

Certain expenses cannot be deducted from rental income. These include:

Phone calls unrelated to the property rental business: Only phone costs directly related to managing the rental are deductible.

Personal expenses: Costs that are not directly related to the property rental business cannot be deducted.

Capital expenditure: Costs for substantial improvements or renovations to a property are not deductible; only repairs and maintenance are generally allowed.

It is important to maintain clear records of all expenses to accurately determine what is deductible and what is not.

Non-Resident Landlords Scheme

The Non-Resident Landlord Scheme (NRLS) taxes the rental income of individuals with a usual place of abode outside the UK. Under the NRLS, tenants or letting agents are required to withhold tax from rental payments before they are sent to the overseas landlord, with the tax year running from 6 April 2024 to 5 April 2025. Tax withheld can be deducted from the landlord's UK tax liability when they file a self-assessment tax return.

Non-resident landlords may still need to file a return even if no tax is due and can apply to receive rental income gross, subject to meeting certain conditions.

Here’s how it works:

The NRLS tax year runs from 6 April 2024 to 5 April 2025. Non-resident landlords can apply to receive their rent without tax deductions by completing the NRL1 form.

The NRL6 form should also be submitted which provides proof of tax paid to HMRC.

If a letting agent manages the property, they must withhold income tax before paying the rent to the landlord. If there is s no agent, the tenant must withhold tax if the rent exceeds £100 per week.

The tax withheld is then deducted from the landlord’s UK tax liability when they file their self-assessment tax return.

Even with no tax to pay, non-resident landlords usually need to file a self-assessment tax return.

Being a non-resident landlord for NRLS purposes does not necessarily mean you are a non-resident for UK tax purposes; you might be considered a non-resident landlord for NRLS while still being a UK resident for tax purposes.

Tenant Obligations under the Scheme

Tenants should comply with certain obligations if they pay rent directly to a landlord with their usual place of abode outside the UK and the rent exceeds £100 a week. Tenants are required to withhold tax from the rent or recover it from the landlord if HMRC specifically asks them to operate the NRLS. They have the right to deduct any tax due from rent and can seek recovery if they have bot deducted it. Tenants need not operate the NRLS if HMRC confirms they are exempt, and if rent is paid to a UK letting agent, the NRLS does not apply.

Joint Non-Resident Landlords Scheme landlords

When paying rent to multiple non-resident landlords, you should apply the £100 weekly threshold separately to each landlord. For example, if you pay £150 a week for a property jointly owned by two non-resident landlords, you do not need to operate the NRLS for either landlord if their individual share of the rent is £75. If rent exceeds £100 a week for any individual landlord, you must withhold tax for that landlord unless HMRC authorizes you to pay rent without tax deduction. To avoid tax deductions and annual return submissions, you must obtain authorisation from HMRC for each landlord.

Types of Property Ownership

Understanding the different types of property ownership in the UK is crucial for managing rental income and taxes effectively. Here is a guide to the main forms of property ownership and how they impact your tax liabilities:

Sole ownership: In sole ownership, the individual pays income tax on all rental income received, with profits taxed according to their personal tax rates after allowable expenses. All rental income must be reported on their self-assessment tax return.

Joint ownership: In co-ownership, each owner reports and is taxed on their share of rental income and expenses. For instance, if two people co-own a property equally, each will report half of the rental income on their tax return, and the income is taxed according to each owner's individual tax band.

Property shared with a spouse or civil partner: In joint property ownership with a spouse or civil partner, rental income is typically divided equally for tax purposes. If the ownership shares are unequal, evidence must be provided to HMRC for an adjustment. Both partners must declare their respective shares of rental income and expenses on their tax returns.

Property ownership via a company: Owning rental property through a limited company involves paying corporation tax on the company's profits, which can be more tax-efficient depending on the earnings. The company must file a corporation tax return and pay tax on its profits, while shareholders may also face personal tax on dividends received.

Multiple properties: When owning multiple properties, you combine total rental income and expenses for tax purposes to offset income and expenses across your portfolio. However, losses from one rental business cannot offset profits from another if they are separate businesses. Overseas property income must be reported separately from UK property income.

Foreign properties: Rental income from properties outside the UK must be reported separately on your tax return. You can typically claim a credit for foreign taxes paid to reduce your UK tax liability, thanks to double taxation agreements. Foreign rental income is treated separately from UK rental income.

Declaring a Loss on Rental Income

Declaring a rental income loss helps manage property investments and reduce tax liability.

If your rental expenses exceed your rental income, you incur a loss, which cannot be used to offset other income types like dividends or pensions. Instead, you can carry the loss forward to offset future rental profits.

For example, if you had an £8,000 rental income and £10,000 in expenses in the 2024-25 tax year, resulting in a £2,000 loss, you can't reduce tax on other income but can deduct this loss from future profits.

To declare a loss, include it in your self-assessment tax return and carry it forward to offset future profits. Maintain detailed records of income and expenses to ensure accurate reporting and compliance with HMRC.

How to Manage Tax on Rental Income From Abroad

If you live in the UK and earn rental income from a property abroad, you must report this income to HMRC.

The tax rules are similar to those for UK income, stating that you can deduct allowable expenses from your earnings.

You may benefit from the property allowance and double taxation agreements, which could reduce your UK tax liability if you have already paid tax on that income abroad.

It is important to note that income from overseas properties should be reported separately from UK property income on your tax return.

How We Can Help You

Navigating the complexities of rental income and property tax can be challenging, but Expat UK Tax is here to guide you through it.

With a constantly evolving property market and intricate tax regulations, understanding these aspects is crucial for optimising your finances and staying compliant.

Our expert advice can help you navigate these complexities, ensuring you maximise tax relief opportunities and maintain compliance with HMRC regulations.

UK Property Taxation

What is Rental Income?

Privacy Policy