A Complete Guide to Self-Assessment Rental Property Tax Return
The HM Revenue & Customs (HMRC) department determines your tax payable on rental income based on what your employment status is and how much profit you make. As per HMRC guidelines, if you are earning a steady income from renting out your property, you will need to pay the applicable taxes and submit a self-assessment tax return.
In this guide to comprehensive rental property tax return, we will discuss how to calculate the amount of tax payable on your rental income and steps to submit self-assessment tax return.
How Much Tax Should You Pay on Rental Income?
Before you apply for tax return, it is important to calculate how much tax is payable on your rental income. For property given on rent, you are liable to pay tax on any profit you earn from rental income and is exclusive of personal allowance, which is set at £11,850 (For 2017/18). The amount of tax on rental income depends on the tax band that you fall into.
To start with it, you have to first calculate your profits.
Profit = Total Rental Income – Any Deductible Expenses
Your rental income will include money made from diverse sources such as following:
- Monthly or quarterly rent paid by your tenants
- Parking fees chargeable on your property
- Utility costs such as electricity, water and gas
- Any additional fees for using your furniture
However, your rental income does not include other services such as cleaning, laundry or regular meals.
If you have multiple rental properties in the same country, you can club all the rental income and expenses together when calculating rental profits. This means you are eligible to claim expenses incurred on one property against income generated from another property.
For 2019-2020, the income tax rates are:
- Taxable income of £0 to £46,350 (Low rate tax band) = 20%
- Taxable income of £46,351 to £150,000 (High rate tax band) = 40%
- Taxable income of over £150,000 (Additional rate taxpayer) = 45%
Let’s take an example. Suppose you earn £15,000 by renting out your property. As discussed earlier, the first £11,850 is tax-free. So, your tax on rental income will be 20% on the remaining £3,150, i.e. £630.
Landlords are eligible for certain tax relief. The following expenses are not included in your rental income, given that these are incurred solely for the purpose of renting out your property:
- Property repairs and maintenance
- Interest on property mortgage
- Utility expenses such as council tax, water, gas and electricity
- Household costs such as advertising, stationery, phone calls
- Accountant’s fees
- Letting agent fees
- Legal fees for tenancy less than 1-year old or renewing a lease less than 50 years old
- Vehicle running costs incurred exclusively for rental business
- Wages of hired help or other services
The HMRC may ask proof of expenses. So, keep all receipts for expenses handy with you.
What Taxes Do I Need to Pay?
If you are a landlord with single or multiple rental properties, it is important for you to know what taxes you are liable to pay. The most common ones are as follows:
- Tax on rental income, exclusive of expenses incurred wholly and exclusively on rental properties
- Stamp Duty Land Tax
- National Insurance Contributions (NIC)
- Capital gains tax
Income tax and NIC is paid annually as per recent regulations, whereas Stamp Duty Land Tax and capital gains tax are payable only when buying or selling a property.
If you fall within the taxable income band, it is imperative to pay your income tax and NIC and complete a rental income tax return each year.
When Should I Apply for Self-Assessment Tax Return?
It is imperative to declare your rental income tax return to the HMRC before the deadline provided by the end of the tax year. For 2017-2018, the deadline to submit self-assessment tax return on rental property is 31 January 2019. You must inform HMRC if your rental income is less than £2,500 a year, but must report it on self-assessment tax return if:
- It is £2,500 to £9,999 after allowable expenses
- £10,000 or more before allowable expenses
The self-assessment process may seem daunting, especially given the number of amendments made to income tax regulations every year. Hiring professional property tax return services can help you with every step of filing self-assessment tax return.
Steps to Self-Assessment Rental Income Tax Return
Here is a step-by-step guide to the self-assessment tax return process.
1. Register for Self-Assessment
The first thing to do is register for self-assessment. You can get complete details here.
If you have filed a tax return before, you will have to register online using the 10-digit Unique Taxpayer Reference (UTR). If you have signed up for the online service earlier, use the same account to file your returns.
If you have not filed a return before, you have to register online and get a letter with your 10-digit UTR. Enrol for the Self-Assessment online service simultaneously.
You can also fill out the online form on your computer, take a print out and post it to HMRC. Make sure you have all necessary documents ready as you cannot save a partly filled up form.
Once you have registered as per the guidelines, you will be able to file your rental income tax return by filling out the Self-Assessment form either on paper or online.
2. Filling Out the Self-Assessment Form
To fill in your tax return form, you will need your UTR, which is assigned at the time of registering for Self-Assessment. It takes approximately 10 days to receive the letter with the activation code from HMRC if you have not registered before. It is also important to keep a record of your rental property income and expenses as you would need the same at the time of filling out the form.
Filing your Self-Assessment tax return can be intimidating, especially due to the changing regulations every year. For expert advice, get professional property tax return services today.