If you earn income from property, you have to declare it correctly. And this is no easy task. Not only does it involve many responsibilities and require knowledge of the rules, but UK law has recently introduced restrictions on reliefs. However, this does not mean that you will always pay high tax on your property income – by enlisting the professional help of an accountant, you can save both time and money.
When Do You Need to Pay Tax on Property?
In most cases, income from UK property does not require a tax return. On the other hand, if you own property abroad and receive income from it, you must tell HMRC about it – on the self-assessment form you submit, in the 'Overseas income’ section.
Also remember that the UK tax system allows you to claim tax relief on the tax you pay in the UK if you pay overseas tax on your income.
Depending on your income, here are the rules:
- Below £1,000: You do not need to file a tax return.
- More than £1,000 but less than £10,000 and profits of less than £2,500: You should contact HMRC to have the tax collected through PAYE.
- Over £10,000 or profits over £2,500: You must file a self-assessment tax return.
Property income and your responsibilities (not just tax!)
Income from property can include rent from tenants as well as benefits in kind – cleaning the property as part of the rent. However, it does not include income from trading – for example, running a hotel.
If you let property, you’ll need to keep accurate records of the rental income and the expenses incurred in generating it, as you’ll pay tax on these amounts. This documentation could include receipts, invoices and bank statements.
You must keep these records for at least 5 years after the end of the tax year. If your records are incomplete, inaccurate or not kept for the required period, HMRC may impose penalties.
How to Calculate Tax on Property Income
Your property tax depends on your total income, including income from employment or other work, which you declare on your Self Assessment. You will pay property tax at the relevant income tax rate, but you will not have to pay National Insurance Contributions (NICs) on property income. The UK government offers special tax relief for
- Renting out a room in your home: You can claim relief on the first £7,500 earned from renting out a room.
- Furnished holiday lets: Relief applies to short-term rentals for tourists.
You may also be eligible for:
- Full relief: If your total rental income doesn’t exceed £1,000.
- Partial relief: If income exceeds £1,000, you can deduct the tax-free amount instead of actual allowable expenses or tax the rental profit.
From 6 April 2020, changes to UK legislation will limit tax relief on the cost of buying a home to the basic rate of income tax of 20%. This includes:
- A portion of interest and other costs.
- Property profits.
- Income after tax-free allowances are applied.
However, the new rules do not apply to the self-employed. As a self-employed person, you will therefore continue to receive relief for interest and other finance costs.
Rely on Professionals to Maximize Your Property Income
By taking advantage of allowable expenses and filing your taxes correctly, you can significantly reduce your property tax bill. This requires in-depth knowledge of tax laws and experience. If you want to minimise your taxes, you should consider professional help. Our tax office will take care of all the paperwork and file your returns with the relevant authorities on your behalf, saving you time and money. You’ll also have the peace of mind that your property income is being taxed correctly.
