How to Mitigate Tax on Your Rental Income


June 4, 2020

Buy-to-let investment is a great way to earn passive income in the short term while watching your asset appreciate over time. Bricks and mortar is still one of the safest ways to invest in the UK — especially for people who are unfamiliar with stocks, bonds, and other types of investing.

However, like any other investment opportunity, there is a high possibility that buy-to-let landlords will need to pay tax on the profits received from their rental income. Profit is calculated after expenses and allowances. This is known as property income allowance and is deducted from the total rent received.

Minature house sculpture with coins around it

If you’re thinking about buying (or have already bought) an investment property, you’ll want to know how to mitigate tax on rental income. Read on, and find out everything you need to know about tax on your investment property and how to make sure you pay the right amount.

 

What tax are landlords liable for?

In the UK, those who earn up to £12,500 per year are exempt from paying tax. Anything after that amount, and you will be liable to pay income tax. The figure counts for any type of income received, whether it’s from a job, business, or investment.

Anyone who is full or part-time employed, or runs their own business, and earns from an investment will be taxed for all their earnings combined.

Example: Someone earning £20,000 a year from their job, and £15,000 from rental income, will be taxed for £22,500, the remaining amount after the initial £12,500 threshold.

Landlords need to be mindful of their overall earnings, taking into account any income from their job and the rental payments they receive. If rent received on an investment property is the sole form of income, then landlords will only be taxed on their investment — and only once it surpasses £12,500 per year.

 

How to avoid paying tax on rental income

Landlords can claim certain expenses and allowances to help mitigate tax and avoid paying higher sums on their rental income. These expenses help to keep overall profits down. Over the years, the UK has seen changes in surrounding what landlords can and can’t claim, which includes particulars around mortgage tax relief.

Woman holding papers with charts and numbers written on them. On the table there are also a pair of glasses and a laptop

As of 2020, landlords can claim expenses and allowances on the following:

Mortgage payments

The overwhelming majority of UK-based landlords have an interest-only buy-to-let mortgage. This means they only pay interest on the amount borrowed, which helps to keep mortgage payments down and increases monthly rental income.

Previously, landlords could claim an allowance for interest on all mortgage payments.

Example: If a landlord paid £5,000 per year on their mortgage interest, they could claim that amount against their profits, deducting it from their tax bill in the process.

However, new legislation means that, from 2020, landlords will only be able to claim a basic rate of 20% of their mortgage interest.

Example: Instead of claiming £5,000, the 20% figure will instead be £1,000. Also, anyone who bought their property outright won’t be able to claim any relief on mortgage payments.

Services

Being a landlord involves many processes and responsibilities, from finding a tenant to sorting out legal cover. The majority of services landlords need to let and maintain their investments are claimable allowances.

  • Letting agent fees for finding and referencing tenants
  • Property management fees
  • Legal fees
  • Ground rent
  • Service charges
  • Cost of finding new tenants (if done without an agent), such as phone calls, advertising, and professional photography or staging

Unknown plumber wearing blue overalls holding a toolbox in one hand and a book in the other

Utilities during tenancies

Landlords can claim any services charged in the rent. These include:

  • Water rates
  • Council tax
  • Utilities, such as gas and electricity
  • Costs of services, such as gardeners and cleaners

Most landlords don't include the above services in the rent. Instead, they typically leave it up to the tenant to pay for council tax and utilities. If, however, the property goes through void periods, landlords will need to cover bills while it's empty. Fortunately, they can claim these costs against their rental profits.

Furnishing

Initially, “wear and tear allowance” was claimable and let landlords subsidise up to 10% of rental income from profits for replacing furnishings in their investment. Now, landlords can only claim for actual domestic items replaced in a rental property — and those furnishing must be the same cost as the original item.

Interior view of a living room with two identical sofas, a coffee table in the middle and a television on the wall behind

Example: A sofa that cost £700 can only be replaced by one up to the same price. It must not exceed the cost.

Landlords also won’t be able to claim costs if they’re furnishing a rental property for the first time. The relief is only on items replaced through wear and tear.

Items included in the replacement of domestic items include:

  • Beds
  • Sofas
  • Carpets
  • Appliances, such as fridges and washing machines
  • Crockery and cutlery
  • Curtain

Replacement items also count when updating furniture from one tenancy to another. Therefore, if landlords replace all furnishings in a buy-to-let in between tenancies, they can claim the total costs for all items.

Property maintenance

During a tenancy, issues could arise around items in the home — such as boilers, dishwashers, and washing machines. It’s the landlord's responsibility to fix the appliance if the problem isn’t the fault of the tenant.

A small device with a screen showing house energy consumptions

All maintenance repairs are claimable, including the cost of labour and potential appliance replacement costs. Landlords can also claim costs from property management companies hired to maintain the buy-to-let property. If landlords decide to manage their property themselves, they may also put a claim in their annual return for their own “management fee”. These fees can amount to 15% of the annual rental income.

 

Should you hire an accountant?

Landlords can calculate their tax returns without any professional help. However, using an accountant will provide peace of mind — and the costs for their services can also be claimed against the final income tax bill.

Accountants offer varying levels of services, from basic calculations to a complete overview of buy-to-let income and expenses. Using an accountant means access to professional advice, and they can provide a detailed breakdown of what landlords can and can’t claim against earnings on rental income.

Wide shot image of living room with grey sofa and a folded blanket on top of the arm with wooden coffee table in front of the sofa that is on top of a beige carpet. Behind the living room on the left hand side are two windows with views of some houses while on the right hand side in the background there is a circular wooden dining table with three chairs surrounding it.

Some landlords prefer to pay a lump sum at the end of each tax return year, while others opt for hiring an accountant on a month-to-month basis so that they can keep track of their tax. It’s entirely up to the landlord whether they choose to hire a professional accountant. But doing so can relieve plenty of stress and hassle.

 

Letting your investment with Blueground

Here at Blueground, we take even more hassle out of letting your property. Our services include finding tenants by renting the apartment from you directly, sorting contracts with tenants, security deposit management, and finding high-quality renters while you enjoy passive income and no void periods. Enjoy not having to worry about any of the stress that comes with letting your London apartment, with Blueground taking care of every aspect of the rental.

 


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