The tax implications of letting property

If you're planning to rent out a property or are already a landlord, it's essential to understand your tax responsibilities.

Tax regulations for rental income can be complex and frequently change. To help you navigate these complexities, we’ve put together a detailed guide on the tax implications of letting a property. This guide will help you stay informed and compliant with current tax laws.

How does renting a property impact my income tax?

When you rent out a property, all rental income must be declared, including non-refundable deposits and additional payments from tenants for services like cleaning communal areas, property repairs, or utility bills. Even any portion of a returnable deposit that you retain at the end of the tenancy counts as income.

Your rental income is taxed at the same rates as your other income, which might be 0%, 20%, 40%, or 45%, based on your tax bracket.

If the rental income pushes your total income into a higher tax bracket, you may face increased tax liabilities. This is an important consideration if you're planning to rent out a property as an additional income stream.

You need to report rental income for the tax year it's earned, even if you receive the payment later.

Allowable expenses related to the rental property can be deducted for the tax year, no matter when you pay the bills.

Landlord tax relief

Prior to April 2017, private landlords were allowed to deduct mortgage interest payments from their rental income before calculating their tax liability.

However, a new buy-to-let system was introduced in 2017 and fully implemented in 2020. Under this system, landlords can no longer deduct mortgage interest payments from their rental income. Instead, they receive a 20% tax relief on the entire amount of interest paid.

This shift can result in higher tax bills for landlords in higher tax brackets. Previously, tax was calculated on rental income after subtracting mortgage interest, but now tax is calculated on the full rental income. This change could significantly increase the tax burden for many landlords.

Capital gains tax

If you sell a buy-to-let property, you may have to pay capital gains tax (CGT) on the profit made from the sale. The tax is based on the gains made, not the sale price. If you let out part or all of the property, a portion of any gain when selling it could be taxable.

In the current tax year (2024-25), if you sell a residential property in the UK, the tax you pay on any profit depends on your income. If you're a basic-rate taxpayer, you'll be charged 18% on the gains, while higher and additional rate taxpayers will pay 24%. You can make up to £3,000 in tax-free gains individually, or £6,000 as a couple if you jointly own assets.

It's important to note that if you do make a taxable gain from selling a residential property, you must pay the tax within 30 days of completing the sale. This means filling out a 'residential property return' and making an immediate payment on account.

If you previously lived in your rental property, you might be eligible for letting relief, which can reduce your CGT bill.

Butters John Bee can help!

For more information on the tax implications of renting out a property, or if you’re considering becoming a landlord, contact Butters John Bee. We can provide the guidance you need.