Make calculating the tax on rental income easy: Top tips

As a landlord, your property is your most valuable asset. Letting out residential and/or commercial property is a great way to make passive income. However, navigating all the tax requirements related to reporting income tax on rental properties and capital costs can be tricky – unless you have a landlord accountant.

In this blog, we share the best tips to stay in the good books of the tax department by calculating the tax on rental income and optimising net returns.

1. Assess the feasibility of various property investments

If you want to invest in a new property but do not know which one to go ahead with, you have to look at which is the best option for you.   For example, residential properties bring less hassle with them compared to commercial ones.

However, administrative complications may arise if tenants change continually – which is common with residential properties. Speaking strictly in terms of VAT, residential properties are tax-free.

On the other hand, commercial properties might comprise 20% VAT if the tax option has been used or VAT may not be eligible in some purchases as VAT is not involved.

What do you do then? Which option do you go with? If you are unsure how VAT works on properties, consult a landlord accountant to help you optimise the tax on rental income.

2. Decide whether you want be an individual or a company

This is a decision that has significant tax implications either way. You will need to understand the pros and cons of each and make a choice based on your goals and the type/amount of property you hold. It is best to consult an accounting professional for this, as they can help you with a tax-efficient plan.

Tax season, especially, can be a headache for many, but with the right preparation and an up-to-date book of accounts, it can be much easier irrespective of whether you run your rental business as an individual or company.

“How much tax do I pay for rental income?” This is a common question that must pop in your head every now and then. Working with a trusted landlord accountant will help you stay abreast of evolving rules and ensure that your filing returns are fully compliant.

3. Keep yourself informed of changing tax rules

There have been several tax-related changes in the last few years, such as those related to Capital Gains Tax, interest payment deductions or furniture deductions.

For instance, did you know that you can no longer simply deduct all of your finance costs from residential property income? You only get a basic rate reduction against your tax liability. However, this rule does not apply to property owned via a limited company.

It can, therefore, be complicated to navigate all these rules, so make sure you are spending enough time educating yourself or speaking to your buy-to-let accountant on the tax on rental income. 

4. Maintain up-to-date records digitally for calculating the tax on rental income

Even small mistakes in your books of accounts can significantly affect your end-of-the-month figures and make it harder to track profits. Ensure that you record every business-related expense and income and tally the totals daily.

In addition, bear in mind that under the MTD for ITSA rules, you will have to compulsorily use MTD-compatible accounting software if your property income exceeds £10,000.

So, if you do not use software already, we highly recommend choosing one so that you are fully compliant in advance. Take help from our expert accountants to help you migrate to a suitable software.

5. Take advantage of family allowances 

If you have a civil partner or spouse, you could save tax by “gifting” them some or all of your rental property. There are several legal considerations that you need to get right here, so study the requirements beforehand. 

6. Do not forget about the benefits of the tax on rental income

Tax laws are not just about coughing up money for HMRC. If yours is a small property being let out for holidays, you could potentially get a 100% relief on business rates. Plus, if your property is being let to multiple tenants for less than 31 days each for a total of 105 days a year, your property counts as furnished holiday lettings, which means you can declare capital allowance on the cost of setting up furniture and interior decor and thus enjoy the relief of capital gains.

7. Plan with a future in mind

Do you want to pass on the property you hold to your descendants as inheritance? Do you want to sell it off when market prices are in your favour? Do you want your property income to be like a retirement fund for your later years? There are tax implications for each, so you are advised to decide on a plan in advance so you can start preparing the appropriate records.

8. Be aware of the laws around UK property disposal

When you sell a rental property, it is not just a case of out of sight is out of mind. You have to promptly declare any relevant tax – CGT, for instance, needs to be reported and paid (if due) within 60 days of the transaction being completed.

Plus, for those who are not UK residents, all UK land disposals (and not just residential property) need to be declared whether or not they realised a capital gain from the sale.

9. If you have past omissions, correct them as soon as you can

The HMRC has shared a “Let Property Campaign” that allows landlords like yourself to voluntarily disclose their undeclared rental income from earlier years and get a lower penalty than you otherwise would for owed tax. So, if you have omitted to file returns for any reason, now is the time. Get your buy-to-let accountant to help you with calculating the tax on rental income!

10. Timely submit Annual Tax on Enveloped Dwellings (ATED) 

Every year, an ATED relief claim must be completed if a company (not an individual) owns a residential property valued at more than £500,000. This claim begins on April 1 and has to be submitted to HMRC within the same year by April 30. Companies are subject to penalties if the deadlines are not met.

Over to you

A smart and experienced buy-to-let landlord will know that the business of purchasing and letting properties has the same principles as that of the ‘game theory’.  Just like players have to make rational decisions – that could hinder their strategy or positively take it to new heights – a landlord must also choose the most suitable tax strategy with minimum hassle.

Whether you are a professional landlord with a well-established rental property portfolio or are just renting out your property as a side hustle – you want a landlord accountant on your team who ensures your investment generates enough rental income and your tax liabilities always skyrockets. Thankfully, you can find that support in us.

We have the right industry knowledge and experience to simplify your life and help you run a successful rental business. If you need help, speak to us today!