Understanding the Tax Implications of Renting Out Your Property

Becoming a landlord can be an attractive investment opportunity, but it also comes with significant tax responsibilities. Whether you’re letting out a second home, your former residence, or a property specifically purchased for rental income, understanding the tax landscape is crucial to maximising your returns and staying compliant with HM Revenue & Customs (HMRC) according to property experts like Hertfordshire letting agents. This guide outlines the key tax considerations for the UK property landlords. 

Income Tax on Rental Profits: 

Any profit you make from renting out property is subject to income tax. Your rental profit is calculated by taking your rental income and subtracting allowable expenses. Depending on your overall income, you’ll pay tax at the following rates (2024/25 tax year): 

• Basic rate: 20% (for income between £12,571 and £50,270) 

• Higher rate: 40% (for income between £50,271 and £125,140) 

• Additional rate: 45% (for income over £125,140) 

For most landlords, declaring rental income is done through self-assessment tax returns, which must be submitted by 31 January following the tax year end (5 April). 

Allowable Expenses: 

One of the most effective ways to reduce your tax liability is by claiming legitimate expenses against your rental income. Allowable expenses include: 

• Mortgage interest (subject to restrictions, see below) 

• Buildings and contents insurance 

• Letting agent and property management fees 

• Legal and accountancy fees 

• Maintenance and repairs (but not improvements) 

• Utility bills and council tax (if paid by you) 

• Service charges and ground rent 

• Domestic items replacement relief 

• Property advertising costs 

It’s crucial to keep meticulous records of all expenses with supporting documentation, as HMRC can request evidence up to six years after the relevant tax year. 

Mortgage Interest Tax Relief Changes: 

Since April 2020, landlords can no longer deduct mortgage interest payments as an expense. Instead, you receive a basic rate tax credit (20%) on your mortgage interest. This change has significantly increased the tax burden for higher and additional rate taxpayers, as the tax relief is now capped at 20% regardless of your income tax band. 

For example, if you pay £10,000 in mortgage interest per year: 

• Before: You could deduct the full £10,000 from your rental income 

• Now: You can claim a 20% tax credit worth £2,000 

Property Allowance: 

If your gross rental income (before expenses) is £1,000 or less in a tax year, you don’t need to report it to HMRC thanks to the Property Allowance. For those with income just above this threshold, you can choose to deduct the £1,000 allowance instead of actual expenses if it’s more beneficial. 

Capital Gains Tax (CGT): 

When you sell a rental property, you may be liable for Capital Gains Tax on any profit made. The rates for property are higher than for other assets: 

• Basic rate taxpayers: 18% 

• Higher and additional rate taxpayers: 24% 

You can reduce your CGT liability by deducting: 

• Purchase and sale costs (solicitor fees, stamp duty, estate agent fees) 

• Capital improvement costs (extensions, loft conversions, etc.) 

• Your annual tax-free CGT allowance (£3,000 for 2024/25) 

If the property was previously your main residence, you may also benefit from Private Residence Relief for the period you lived there, plus the final nine months of ownership. 

Stamp Duty Land Tax (SDLT): 

When purchasing a rental property, you’ll pay an additional 3% SDLT surcharge above the standard rates. This applies if you already own another property (including your main residence) at the time of purchase. 

For example, on a £300,000 property: 

• Standard SDLT: £5,000 

• With 3% surcharge: £14,000 

This significant upfront cost must be factored into your investment calculations. 

Furnished Holiday Lettings (FHLs): 

Properties qualifying as Furnished Holiday Lettings receive preferential tax treatment, including: 

• Mortgage interest costs can still be deducted as expenses 

• Capital Gains Tax reliefs including Business Asset Disposal Relief 

• Capital allowances for furniture and fittings 

To qualify, your property must be: 

• Available for commercial letting for at least 210 days per year 

• Actually let commercially for at least 105 days 

• Not normally let to the same person for more than 31 consecutive days 

Non-Resident Landlords: 

If you live abroad but rent out property in the UK, you’re classified as a non-resident landlord. Your letting agent or tenant (if they pay you more than £100 per week) must deduct basic rate tax from your rental income unless you’re approved for the Non-Resident Landlord Scheme, which allows you to receive rent gross and pay tax through self-assessment. 

Inheritance Tax (IHT): 

Rental properties form part of your estate for Inheritance Tax purposes. While your primary residence may benefit from the Residence Nil Rate Band, investment properties don’t qualify for this additional allowance. Estate planning strategies such as placing properties in trusts or using life insurance policies can help mitigate potential IHT liabilities. 

Record Keeping: 

HMRC requires landlords to keep records for at least six years. This includes: 

• Rental income received 

• All expenses and receipts 

• Property purchase and improvement documents 

• Mortgage statements 

• Copies of tenant correspondence and agreements 

Digital record-keeping is increasingly important with the expansion of Making Tax Digital, which will eventually apply to all landlords. 

Final Thoughts: 

The tax landscape for property rentals is complex and ever-changing. What might be tax-efficient today could be less advantageous after the next Budget. Many landlords find value in consulting with tax professionals who specialise in property to ensure they remain compliant while optimising their tax position. 

Remember that tax avoidance (legally minimising tax) is legitimate, but tax evasion (illegally concealing income) carries severe penalties including fines and potential prosecution. Always declare your rental income and seek professional advice if you’re uncertain about your obligations.