Rental Property – Tax and National Insurance Payment
Tax may be due when you rent property.
Starting a property business
If your profits are equals to or greater than £6,515 per year, you must pay Class 2 National Insurance. And you are running a business, i.e.,
- Renting out property is your main business
- More than one properties are rented out
- New properties are being purchased for renting out
You can elect to make voluntary Class 2 National Insurance payments if your profits are less than £6,515. This will allow you to get the full State pension.
Property that you own
Tax-free: The first £1,000 of income you receive from property rental is exempted. It is called “property allowance”.
If your rental income is between £1,000-£2,500 per year, contact HMRC.
Income to be reported in Self-Assessment tax return:
- After deductions, £2,500 to £9999
- Before allowable expenses, £10,000 and more
Registration for Self-Assessment
You must register by October 5 if you don’t usually send a tax returns, following the tax year in which rental is earned.
Unpaid tax declaration
Unpaid tax can be declared to HMRC by disclosing previous years’ rental income. After declaration, you have to pay lower penalty than what would be payable if HMRC find out about it.
A disclosure reference number will be provided to you. Then, you have three months to calculate what you owe then pay it.
For tax years prior to 2017-2018, the £1,000 tax-free allowance on property is not included.
Property of a company
Rental income is calculated like any other income is calculated.
Deduction allowed:
Different tax rules apply to:
- Residential properties
- Furnished holiday rentals
- Commercial properties
Residential properties
After deducting ‘allowable expenses,’ you or your company will have to pay tax on the rental profit.
In day-today operation of your property rental business, allowable expenses are:
- Fees paid to letting agents
- Legal fees for renewals of leases for less than 50-year terms and for lets for less than one year
- Accounting fees
- Buildings and contents insurance
- Repair and maintenance of the property, but not improvements
- Water, electricity, gas, etc., utility dues
- Service charges, rent, ground rent
- Tax payable to council
- Cleaning and gardening service payments
- Other costs associated with letting the property include advertising, phone calls and stationary.
Allowable expenses don’t include capital expenditures, such as buying a property or renovating it beyond repair for wear and tear.
Tax relief may be available for money spent to replace a “domestic item”. This is known as ‘relief for replacement of domestic items’.
These domestic items include:
- Crockery, cutlery.
- Curtains
- Fridges
- Sofas
- Carpets
- Beds
The domestic item must be purchased for tenants in a residential home. Replaced items must no longer be in use.
You can get the replacement of domestic goods relief starting from:
- The 2016-2017 tax year for individuals as well as partnerships
- For companies, from 01-04-2016
Furnished residential rentals
‘Wear-and-tear allowance’ might be available
- For the 2015-2016 tax year for individuals or partnerships
- For companies, on or before 31/03/2016
Furnished holiday rentals
You may be eligible for the following:
- Plant and machinery capital allowances for furniture, furnishings, and other equipment in the let property as well as equipment used outside of the property (like tools, and vans)
- Capital Gains Tax Reliefs – Entrepreneurs’ Relief, Business Asset Rollover Relief, relief for loans for traders, and relief for gifts of business assets
These can only be claimed if you meet the following conditions:
- The property is available for rent for at least 210 days per year
- It’s rented for over 105 days per year
- No single let lasts more than 31 days
- You charge the market value for similar properties in your area (the going rate)
Your profits are considered earnings for pension purposes if you own the property.
Commercial properties
If you rent out commercial property, such as a shop or garage, you can claim capital allowances for plant and machinery (some items).
Calculating your profit
As if your property lettings were a single business, you calculate the net profit and loss for each of them (except furnished holiday rentals). This is how you do it:
- Add all of your rental income together
- Add all of your allowed expenses
- Deduct the expenses from the income
To ensure you claim only the tax benefits for eligible properties, separate out profit and loss from furnished holiday lettings.
Making a loss
Set off the losses, if any, with your profit and enter the amount on the Self-Assessment form.
Losses can be set off against:
- Future profits (carry forward to a future year)
- Profits from other properties, if any
Losses can be set off against same business future profits.
