What Taxes Does A Landlord Have to Pay in the UK?

If you have a second property and you earn income through rent you have to pay taxes. The question is what taxes exactly? Also, you may be eligible to get certain allowances, however, this depends on your annual earnings. Here are some tips to get on top of taxes for earnings through property renting.

Make sure you double-check all the details if you are not completely certain about something, this is just a short report on tax liabilities and potential cuts.    

Income tax

The earnings you make through property rent will be added to all the other income you make. This includes employment and savings income. Furthermore, you need to declare property income on a self-assessment tax return. However, you will be given certain property allowances and they will lessen the amount you have to pay to the taxman.

First of all, you have a personal allowance that is not taxable. This is applicable for the amount of £12,500 in the 2020/21 tax year. After this is considered, all additional rent you receive will be taxed at your personal tax band.

Also, consider checking if you are eligible for a property allowance. That is, you can be excused from paying tax for your first £1,000.

Landlord Allowance

Earlier you could deduce your mortgage payments from your rental income. However, since April 2016 this is no longer possible. Now, your rental income is taxed as stated above and you will get a 20% tax credit for your mortgage interest.

Not only that, the so-called wear and tear allowance of 10% is also no longer permitted. But you can use other costs to reduce your tax bill. Things like expenses associated with the running of the property, council tax, and utility bills. Furthermore, you can also get tax relief if you replace domestic items like beds and other furniture.

Stamp Duty

There is a chance you will pay a lot of money because of the 3% stamp duty on “additional homes”. That includes buy-to-let properties as well. The new stamp duty band came in April 2016 and it is calculated for the entire property price.

Capital Tax

When you sell a property that is not your primary home you may become subject to capital gains tax (CGT). That is, you will pay tax for the rise in value over the time you were the owner of the property.

All of us in the UK have the right to a CGT allowance. If you make a profit that is below £12,300 for the tax year 2020/2021 you are not subject to tax. However, if you pass that amount you will pay 18% or 28% if you belong to the category of a high-rate taxpayer.

The plus side here is that you can gain a tax reduction for major capital investments you made in the property. Just make sure you keep proof of large costs.

Finally, if you are not absolutely sure of the tax liabilities you have to ask your accountant about all the details. They are professionals that have the knowledge you need to make sure you are paying all your taxes and also saving money where you can.