What UK landlords must know about HMO rentals

6 min read

Renting HMO units (Houses of Multiple Occupation) is not the same as renting regular properties. It can be more profitable owing to the high demand, but it requires you to follow several HMO regulations as a landlord. As always, we advise asking an accountant with landlord expertise like Golding, about your specific obligations.
To start you off, though, here is a quick guide to everything you need to know about taxes on your HMO rentals:

What is HMO?

A property is deemed an HMO if at least three tenants live in it and it comprises more than one household with a shared bathroom, toilet and/or kitchen. An example would be student accommodation or coliving flats. As an HMO landlord, you are subject to specific rules and regulations regarding HMO rentals.

Challenges of being an HMO landlord

HMO rentals come with their challenges that you will need to be aware of:

1. Obtaining an HMO licence

This can take several months as the associated councils evaluate your property; even then, there is no guarantee that you will get a licence. The HMO licence cost varies depending on the location and size of your property.

2. HMO Council Tax

The amount of council tax due can be higher with HMO rentals than single-dwelling properties due to multiple households living in the same property.

3. More rules and regulations

HMO rentals involve more compliance requirements than regular properties. This includes safety checks and standards to uphold.

4. Financial regulations

Collecting and managing rent from multiple households can pose an additional financial management burden unless you have the right software to create separate P&L accounts for each household.

5. Higher initial costs

The setup costs for HMO properties are higher, as you may need to adjust them to comply with the regulations of local authorities.

6. Mortgage accessibility

Securing a mortgage for an HMO property could be harder and involve a bigger security deposit than for regular properties, as banks tend to prefer experienced landlords who run single occupancy properties.

7. Managing multiple households

HMO rentals typically involve more wear and tear than regular households owing to the higher number of people per property unit. The average lease times are also shorter, which means higher tenant turnover.

Legal responsibilities regarding HMO rentals

If you run an HMO as a landlord, here are the legal responsibilities you must fulfil:
  • If five or more tenants are living in it, you have what is known as a large HMO, and you will need a licence from your local council.
  • In addition, it is good to check with your local council anyway because some also require smaller HMOs to have a licence.
  • The council must conduct a risk assessment on your HMO within five years of receiving your licence application, and you will need to take care of any unacceptable risks they find. There are also other checks you need to keep in mind:
  • For gas safety,ensure gas equipment is safely installed and maintained by a Gas Safe registered engineer. Annual safety checks on all appliances are required, and tenants must be supplied with a copy of these records.
  • For fire safety, please make sure you have working smoke alarms on each floor and carbon monoxide alarms in rooms with solid fuel-burning appliances. Accessible escape routes must be provided at all times, and all supplied furnishings must meet fire and safety standards.
  • Regarding electrical safety, you should ensure that all supplied appliances and electrical systems, such as sockets and light fittings, are safe. The guidelines also hint at the importance of meeting regulations outlined in various legal documents like The Housing Act, Furniture & Furnishings, The Regulatory Reform Order, Smoke & Carbon Monoxide Alarm Regulations, and Building Regulations.
  • If you or your tenant plan to change the HMO, you must inform the council. You must also inform them of any change in your tenants’ circumstances, such as their having or adopting a child.
  • Tenants can report any hazardous circumstances in your HMO to the council whenever they need to, and you will be held accountable for sorting those out.

Is HMO rental income taxable?

The rent you receive from an HMO becomes taxable once it crosses certain thresholds. How much tax you pay depends on:
  • Any income from overseas properties that you own (to be reported separately to HMRC)
  • The HMO rental income you get from all the properties you rent out
  • The taxable income you get from other taxable sources
  • The tax expenses and allowances you claim
Your final tax bill depends on the tax band you fall into with your total taxable income. For the 2023/24 tax year, these bands are:
  • Up to £12,570 – 0% (personal allowance)
  • £12,571 to £50,270 – 20% (basic rate)
  • £50271 – £125,140 – 40% (higher rate)
  • More than £12,140 – 45% (additional rate)

Which HMO tax expenses can be claimed?

Expenses that you incur wholly and exclusively in the renting out of your property can be claimed. You can also claim partial expenses as long as you accurately demonstrate how much you spent on the HMO.
Allowable expenses can include:
  • Cost of disposal of old furniture or electrical appliances in the rental units
  • Water rates, gas and electricity (if paid by the landlord on behalf of the tenants)
  • Direct costs, such as advertising the HMO property
  • Redecoration/repairs between tenancies
  • Vehicle costs (used for HMO business)
  • Property maintenance/repair costs
  • Ground rent and service charges
  • Gardening and cleaning costs
  • Bookkeeping fees
  • Agent fees

Register as an HMO landlord for Self Assessment

You will need to register online with HMRC for Self Assessment or log into your existing Self Assessment account if you have one.
If you are registering for the first time, you will need to do so by 5th October of the tax year following the one where you earned the income on HMO rentals (the UK tax year is from 6th April to the following 5th April):
  • Your tax-free property allowance is the first £1,000 you earn from rental income.
  • If you earn between £1,000 and £2,500, you must contact HMRC about how to report it.
  • If you earn between £2,500 and £9,999 after allowable expenses have been deducted (or £10,000 prior to the deduction), you must report your income via Self Assessment.

How to report your income on HMO rentals

You must report your HMO rental income through a Self Assessment tax return. Here is the process:

1. Gather your records

This includes all income and allowable expenses related to your HMO property. Income can come from rent, charges for additional services, payments for using shared amenities such as a laundry room, and insurance payouts if the property was damaged and had to be repaired.

2. Fill out the Self Assessment form

Log into the Self Assessment portal on the HMRC website. Fill out the property income section of the form detailing your income and expenses.

3. Pay your tax

Your tax bill will be calculated based on your total income and the tax band you fall into. You will need to pay this amount to HMRC by the deadline.

4. Keep your records safe

HMRC can ask for evidence of your income and expenses up to 5 years after the submission. Therefore, keep your records safe.

Over to you
It is worth noting that HMO rentals can be a bit complex, especially if you have multiple sources of income or multiple properties. If you are unsure, seeking advice from Golding Accountancy is often a good idea.
Our landlord accountants can help you navigate the process and ensure you pay the right amount of tax and claim all your allowable expenses. To find out more, book a free consultation with us.
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