Are you a landlord? Happy that you have your tax affairs in order?
Letting out part of a property can be a daunting prospect and a big responsibility. However, it is important that you do not forget to inform HM Revenue & Customs (HMRC) and pay your tax.
Some students have solved the issue of finding suitable accommodation when they are studying by buying their own property, either through family support or using savings. It may also be possible to sub-let the other rooms to fellow students. But are you sure you understand the tax position of being a landlord? This article will talk you through some of the issues.
How do I let HMRC know I am a landlord?
It is your responsibility to let HMRC know that you are earning some extra income from letting out some or all of your property. If you have not yet registered for the 2014/15 tax year (which runs from6 April 2014 to 5 April 2015) then do so using the link on GOV.UK. If you are eligible to claim rent a room relief (see below) then you do not need to notify HMRC about your rental income. If you have been a landlord during earlier tax years but have yet to notify HMRC, they are currently running a disclosure campaign to allow you to put your tax affairs straight.
What is rent a room relief?
If you qualify for rent a room relief, your rental profits will not be taxable and you will not be required to complete a self assessment tax return. You may qualify for this relief if you let a furnished room(s) in your home from which you earn rental income of up to £4,250 during a tax year; there are further details on this and why you may not want to claim it on our website.
What do I pay tax on?
If you do not qualify for or want to claim rent a room relief then you will need to calculate your rental profits as this will be the income that you pay tax on. This should be the rental income that you were due during a tax year less any allowable expenses. The income includes any rent due but which may be paid late, even after the end of the tax year. If you do not recover the owed rent and have to treat it as a bad debt then that will be an allowable expense.
Expenses which you can deduct from your rental income include insurance, repairs to the property (but not capital improvements nor initial costs to enable the property to be let) and the interest cost on loans to purchase the property. You may want to claim wear and tear allowance if your property is furnished.
When do I pay tax?
Depending on your circumstances you may have to complete and file a tax return under self assessment. Your tax return must be filed by either 31 October following the end of the tax year, if you are filing a paper tax return or if you are filing online then by 31 January following the end of the tax year. Usually you will have to pay any tax owed (after taking account of your personal allowance) by 31 January following the end of the tax year.
So, for example, if during the 2014/15 tax year your only taxable income is a rental profit of £12,000 then you will need to file a paper tax return by 31 October 2015 or file it online by 31 January 2016. You would usually be expected to pay tax of £400 by 31 January 2016 (£12,000 less personal allowance of £10,000, results in taxable income of £2,000, which is taxed at 20% so the tax due is £400).
Don’t forget – Council tax!
The rules regarding council tax (or rates in Northern Ireland) are different depending on which part of the United Kingdom you live in. There is a general assumption that students do not pay council tax – however, this may not be the case especially if not all of your household are students. As a landlord you will usually be responsible for paying the council tax so it is worth your while clarifying what the council tax position is and monitoring it if there are any change of circumstances of your tenants. For more information see our website.
There is more information on tax and rental income on the other income section of our website.
And finally, remember you will have other obligations as a landlord. Do not forget about these.