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Residential landlord tax rates

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Landlord Tax Rates

Do I need to pay tax?

Most landlords are required to pay rental tax to HM Revenue and Customs (HMRC) by registering as a self-assessment tax payer.

You’ll need to pay Class 2 National Insurance if you a run a property business and:

  • Your profit is more than £5,965
  • Being a landlord is your main job
  • You rent out more than one property

There are a few situations where you won’t be required to pay rental income tax:

  • If you make less than £2,500 a year in rental profit.
  • If you’re only letting out a furnished room or floor, and your rental profit is below £4,250 a year.
  • If you earn more than £4,250 and register as a residential landlord.

You must always report your income to HMRC.

If you’re not paying tax, you can make voluntary Class 2 National Insurance payments, to ensure you get a full State Pension.

Tax rates

The rate of tax you pay depends on your total taxable (net) income. If you own property jointly with your spouse, you may be able to combine your tax allowances.

If you earn more than £11,500, you’ll fall under one of three tax rates:

    • Basic rate 20%: Everything you earn between £11,501 and £45,000 will be taxed at 20%.
    • Higher rate 40%: Everything you earn between £45,001 and £150,000 will be taxed at 40%.
    • Additional rate 45%: Everything you earn over £150,000 will be taxed at 45%.

How do I work out my net income?

Your tax amount will be based on your net income. If you have more than one property, HMRC will treat them all as one business, so you’ll need to work out your cumulative net profit or loss.

If you own properties both in the UK and abroad, your overseas properties are treated separately. To work out your net profit you can:

      • Add together your total rental income.
      • Add together all your allowable expenses.
      • Take the expenses away from the income.

If you find you have made a loss, you can offset your losses against future profits by carrying it forward to the next tax year, or against your other properties.

What are ‘allowable expenses’?

HMRC allow you to deduct certain expenses from the earnings you’re taxed on. These are known as ‘revenue expenses’ and are the costs incurred during the day-to-day running of your business, as a residential landlord:

        • Letting agents’ fees (including fees to prepare inventories).
        • Legal fees associated with the day-to-day management of your rental property.
        • Accountants’ fees.
        • Landlord insurance, such as building and contents insurance.
        • Interest on property loans (mortgages).
        • Costs associated with property maintenance and repair (excluding improvements).
        • Utility bills (gas, water and electricity) – unless paid by your tenant.
        • Ground rent and service charges.
        • Council Tax – unless paid by your tenant.
        • Domestic services (such as cleaning and gardening).
        • Other costs directly associated with renting out a property (such as phone calls, stationery, advertising and commuting to and from the property).
        • You may also be able to deduct a wear and tear allowance or a renewals allowance (see below).

If you rent out furnished holiday homes, you’ll only be eligible to claim for these expenses if you fulfill certain conditions.

What is Stamp Duty Land Tax?

If you’re buying property or land that costs more than £125,000, you’ll need to pay Stamp Duty Land Tax. The amount you pay is calculated as a percentage of the property’s value. This is:

          • 2% on properties between £125,001 and £250,000.
          • 5% on properties between £250,001 and £925,000.
          • 10% on properties between £925,001 and £1,500,000.
          • 12% on properties above £1,500,000.

Inheritance tax rates

If your estate (properties, money and possessions) is worth over £325,000 when you die, inheritance tax will need to be paid by the executor of your will or the administrator of your estate. The rate of this tax is 40% of the value of your estate, but can be reduced to 36% if you leave 10% or more of your estate to charity.

Trading income for non-residential landlords

While residential landlords receive a ‘rental income’, owners of hotels, guesthouses and B&Bs earn a ‘trading income’. If you’re running a trade, you’ll need to register as self-employed and pay taxes through the HMRC self-employment system.

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