If you’re one of the thousands who have invested in a rental property, there are some important tax issues you need to consider when paying tax on rental income.
HMRC are clamping down on landlord tax that has been undeclared and if you have letting income you may be receiving a letter from them soon regarding their 'Let Property Campaign'!
Property owners who have unwittingly made errors but come forward in an ‘amnesty’ of sorts will face penalties of 20% plus tax and interest. Those who don’t come forward may receive penalties of 100% and may face prosecution. All rental income must be declared to HMRC.
‘We would be happy to discuss ways to reduce your taxable income.’
You only have to pay tax on any profit you make from rental income after deductions for allowable expenses. These include things you need to spend money on in the day-to-day running of the property.
Rent a room scheme
The Rent a Room Scheme lets you earn up to a threshold of £4,250 per year tax-free from letting out furnished accommodation in your home. This is halved if you share the income with your partner or someone else.
Capital improvements to your rental property
At some point, it’s likely that you’ll want to make your rental property more profitable by adding space or making it more liveable. These are called ‘capital improvements’, because they add value to the property.
Although you can’t claim these costs as expenses, you can offset the cost of the work against the taxable profit when you sell the property.
Keep track of your expenditure
It’s important to keep a record of certain documents and correspondences to use as proof when claiming tax relief.
Selling your rental property
You usually don’t have to pay capital gains tax on your own home, but you may have to on any profits you make from selling a rental property. You can, however, get some relief.
Lettings relief is available to those who have let out all or part of a home. It’s calculated as the lower of the following three options:
- The amount of Private Residence relief due
- The amount of gain you’ve made on the let part of the property
After these deductions, your profit will be taxed 18% for standard income tax band (20%), or 28% for higher band taxpayers, minus that year’s annual exemption, which is £11,000 in the 2014/15 tax year.
Need help to make a disclosure to HMRC?
Need help filling out your Self-Assessment tax return?
Then contact Dawn for further information. Email Dawn