Paying Tax On Rental Income

Do you own any kind of property and give it to people to receive rent? If yes, do you pay tax on a rental income? Well, even if you don’t, you may be liable for this tax on rental income. Rental income is the money that you get for renting your property. Now it isn’t just the rent of the house. It includes any kind of payments you receive for the use of furniture. It also includes the earnings from any additional services such as heating, hot water, cleaning, repairs, etc. This blog covers details on paying tax on rental income.

Understanding property and taxes

The income tax on rental income depends greatly on the type of ownership. This refers to the fact that you own the property individually or share co-ownership with someone. If you do share, then the income tax on rental income depends on how much your share is. Here is how it works.

Joint ownership with civil partner

If you are married or live together with your civil partner, then income tax on rental income works in the following way:

Default rule

HMRC assumes that you and your partner are entitled to 50% of the rental income and the property. You may own more than your spouse. The income tax on rental income will be charged at 50%.

Exception rule

If you own the property in unequal shares and receive rent unequally too,  you may wish to be taxed accordingly. You can pay the income tax on rental income by doing the following:

• Declare your beneficial rates. This means explaining who actually benefits from the income.
• Submit Form 17 to HMRC with evidence of your ownership.

Joint owner with anyone else

If you co-own property with anyone other than your spouse, then your income tax on rental income will depend on the share you own. If you own the property 50/50 but wish to allocate the income some other way say 60/40, you can do it. You must have documentation to support your arrangement.

How Can I Avoid Paying Tax on Rental Income

You might ask, ‘How can I avoid paying tax on rental income?’. Well, you cannot avoid it altogether, but you can reduce it. Before calculating taxes on rental income, you can subtract tax allowances from them. There are multiple types of tax allowances that you get based on property ownership. Here is a complete breakdown of these tax allowances.

1. Property owned by a person

If you own the property yourself, then you get the following allowances:

Property allowance

You get a property allowance of £1,000 per year. If your rental income exceeds this, then you have to inform HMRC. This is applicable till rental income is £2,500 per year. You have to report it in the Self Assessment in the following cases:

• If it is £10,000 before allowable expenses
• If your rental income exceeds £2,500 after allowable expenses

Wear and tear allowance

You can get a wear and tear allowance on your furnished residential property. It means that you can claim 10% of your rental income if your furniture or appliances undergo wear and tear. These can include TVs, beds, sofas, curtains, etc. It is applicable for the 2015-2016 tax year. It is replaced by replacements of domestic items relief.

Replacements of domestic items relief

You can also get tax relief on replacing domestic items in this kind of property. The domestic items include:

• Sofas
• Beds
• Carpets
• Curtains
• Fridges
• Crockery
• Cutlery

These items should only have been bought for tenants. You cannot put the item you replaced on your property. Moreover, this allowance is available from the 2016 to 2017 tax year.

2. Property owned by a company

You have different kinds of tax allowances based on the type of your property; it can be residential, commercial or fall under furnished holiday lettings. Here’s how the allowances work.

Residential properties

If you own residential properties through your company, your allowable expenses are the costs of day-to-day runnings. These include:

• Council tax
• Services you pay for( gardening and cleaning)
• Fee of the accountants
• Utility bills (gas, water and electricity)
• Letting agents’ fee
• Buildings insurance
• Contents insurance
• Rent and ground rent
• Legal fees for the following: Lets of a year or less or renewing a lease for less than 50 years

Replacement of domestic items relief is also applicable here. It is available from 1st April 2016.

3. Commercial property

If you rent out commercial property (shop, garages, etc.), you can claim the following allowances on some items::

• Plant capital allowances
• Machinery capital allowances

Furnished Lettings

You can also claim a wear and tear allowance here if your furnished letting is residential. It is applied on or before 31 March 2016 for companies.For your furnished letting that is a holiday home, you can claim certain tax allowances. For these to be applicable, your property should be available as such an accommodation for 210 days per year. It should be used as a holiday residence for at least 105 days per year. Your longer lets should not be for more than 91 days a year.If you fulfil this criteria, you can claim the following allowances:

• Capitals Gains Tax relief
• Business Asset rollover relief
• Entrepreneurs’ relief
• Relief for gift of business assets
• Relief for loans to traders
• Plant and machinery capital allowances on furniture and equipment