In the UK, income from property comes with certain specific obligations. This means that in most cases you will have to include it in your tax return to HMRC and pay the tax due. In this article, you’ll find all the key information you need to know about calculating your tax base and filing a tax return.
What is property income?
Property income can relate to land or buildings, including rental income from:
- an apartment or house,
- a part of an apartment or house (e.g., a room or parking space),
- other sources (e.g., a campervan, houseboat).
Therefore, this income may be mainly rent from tenants, but could also include payments in kind (e.g. cleaning the property instead of paying rent).
This term does not include income from trading – such as running a farm, hotel or unrelated business at home (handicrafts, hairdressing, etc.).
Do you have to pay tax on property income?
The answer to the headline question may seem obvious. Yes, you must pay tax on income earned in the UK, including income from property. The only exceptions are situations covered by tax exemptions.
Do you have to pay tax on property income from abroad?
Things get a little more complicated when it comes to income from property outside the UK. Much depends on specific circumstances, such as your tax residency status and where you live in the UK.
As a UK resident, you are generally required to tell HMRC about your overseas income. However, instead of adding it to your UK property income, you declare it in a separate section (overseas income) when you complete your Self Assessment tax return.
The rules for calculating the taxable amount are the same as for UK income. Under the UK tax system, you may also be able to claim tax relief on the UK tax due if you have paid foreign tax on the income.
What is the tax rate on property income in the UK?
If your property income is taxable, you will pay tax at the appropriate income tax rate. You will also need to take into account employment income and other work-related income (such as self-assessment or pension income).
Property income is considered 'unearned’ income. This means that you do not have to pay National Insurance Contributions (NICs) on it. However, in some unusual cases you may be treated as carrying on a trade (for example, if you own a hotel or guesthouse). In such cases, NICs may be payable.
Tax reliefs and exemptions on property income in the UK
The law also provides certain specific reliefs for individuals earning income from property. These include cases such as:
- Renting out a room in your home – you can claim tax relief on the first £7,500 of income from renting out a room in your main home,
- furnished holiday letting – when you rent out a property to tourists and visitors for a short period of time.
You may also be eligible for a property tax exemption, which offers two options:
- Full relief – available if the total rental income is £1,000 or less. In this case, you do not have to file a return with HMRC or pay any tax,
- partial relief – if your property income exceeds £1,000, you can choose to:
- deduct the tax exemption from rental income instead of actual allowable expenses (if there are few expenses),
- calculate taxable rental profit in the normal way (if there are many expenses).
If you want to opt out of full relief or claim partial relief, you must make your decision by 31 January following the end of the tax year – for example, if you want to opt out/claim partial relief for the 2021/22 tax year, you have until 31 January 2024. You make this election by ticking the relevant box on your self-assessment tax return.
How to calculate taxable property income profit?
From 6 April 2017, profits for a given period will generally be the amount you actually receive from renting. This means, firstly, that you will generally calculate profits on a cash basis (if you are an individual and your property income is less than £150,000). In this case, you only include the income you actually receive – for example, if a tenant is late with one month’s rent in a given year, you only include 11 months’ rent in the return.
In addition, the amount paid by tenants is reduced by any allowable expenses – the result is the taxable base.
What are allowable expenses?
The above-mentioned deductible expenses play a crucial role in the calculation of the tax base. These are amounts spent 'wholly and exclusively’ on the letting of the property.
This can include, for example, the cost of repairs and renovations needed to keep the property in a rentable condition or to update its decoration, insurance costs, advertising costs to find a tenant, estate agent’s fees, council tax and water bills, or even interest on money borrowed to buy or improve the property.
In addition, since April 2016, it has been possible to deduct the cost of replacing furniture, appliances and kitchenware, as well as the cost of disposing of old equipment (after deducting any amount received from its sale).
Is the deposit paid by the tenant taxable?
Money received as a deposit is not really yours – you must keep it safe and return it later. It is therefore not taxable.
An exception to this is if you retain part of the deposit, for example to repair damage caused by the tenant. In this case, the amount withheld is included in the taxable rental income (but not the remaining part of the deposit returned to the tenant).
However, as the cost of repairs is an allowable expense, it will usually be deducted from the refundable deposit, so you won’t have to pay tax on it.
What if you „lose” on renting property?
However, as the cost of repairs is an allowable expense, it will usually be deducted from the refundable deposit, so you won’t have to pay tax on it.
However, if you have no other properties and your expenses exceed your profits, the loss is generally carried forward to the next tax year.
Limiting tax relief on interest and other financial costs
From April 2017, tax relief on interest and other finance costs will be limited to the basic rate of income tax for residential property.
This means that finance costs for residential property are no longer deductible when calculating taxable rental income. Instead, the tax liability is reduced by a reduction in the basic rate of tax. This reduction generally corresponds to the interest and other financial costs.
The tax reduction equals the basic rate (currently 20%) of:
- the appropriate proportion of interest and other financial costs,
- property profits,
- adjusted total income – income after deducting the tax-free allowance, excluding interest and dividend income. The tax reduction cannot be refunded.
Currently, interest and other financial charges cannot be deducted when calculating taxable rental income. To calculate your basic rate tax relief, you must use 100% of your interest and other financial charges.
Does property income count towards pension contributions?
Property income is generally not counted towards income for pension contributions. It is considered „unearned” income.
However, if you run a business involving the use of property, such as a hotel or guest house, your profits are treated as business income (i.e. earnings). In this case, they are included in your pension contributions.
Do you need to file a tax return to report property income?
If you have taxable rental income, you may need to file a tax return. Sometimes, HMRC can collect tax on a small amount of income through the Pay As You Earn (PAYE) code.
For example, if your gross income is:
- less than £1,000 – no need to file a tax return,
- more than £1,000 but less than £10,000, and your net rental income (profit) is less than £2,500 – contact HMRC to check whether the tax on the profit can be collected through PAYE,
- more than £10,000 or your net rental income (profit) is more than £2,500 – you must file a tax return.
Once you start earning taxable rental income, you must notify HMRC as soon as possible, but no later than 5 October following the end of the tax year. For example, if you start receiving such income by 5 April 2021, you have until 5 October of that year to notify HMRC.
Remember that if you fail to declare your income to HMRC and they receive information about it from third parties, such as the Let Property Campaign, you could face higher penalties.
Selling property or long-term leasing and tax consequences
The rules outlined above apply only to short-term rentals. Different rules apply to long-term rentals or leases of 50 years or more.
If you sell the property, you may have to pay capital gains tax. However, if the property has ever been your home, you may be able to claim capital gains tax relief.
Where to find more information on property tax?
More information on income tax on rental property is available on the GOV.UK website, and technical guidance from HMRC is available in the property income manual.
