News - Tax

Tax for landlords – things to consider

8 June 2022

In this article we will cover tax for landlords, focusing on “accidental landlords”, and how to be compliant.

First things first, what is an “accidental landlord”? This is where someone becomes a landlord through circumstances rather than by choice.

A common example of this is where two people get together who both have their own home and then decide to move in with each other, but it could be the case that it is not feasible to sell the other property, and so it is rented out. Another instance could be someone inheriting a property and opting to rent it out before selling it in the future.

Both income tax and capital gains tax need to be considered for those owning a property in addition to their main home.

Income tax considerations

If an additional property is being rented out, then it is likely the taxpayer(s) will need to prepare and submit annual self-assessment tax returns and pay any tax due to HMRC.

Mortgage costs as an expense

Where there is a mortgage on the rental property, it is often assumed that the total mortgage payments are deductible for tax, and so the taxpayer may consider that there is no rental profits, after deducting costs from rental income, however this is not case.

Rather, for repayment mortgages, the capital element is ignored for rental profit calculation purposes, and just the interest is considered. Since April 2017, relief on finance costs (including mortgage interest) has been restricted on a sliding scale, and since the 2020-21 tax year, 0% of finance costs are deducted from rental profits, with 100% of costs available as a basic rate deduction, provided certain conditions are met. For more information on this, click here.

This could mean that landlords not currently within self-assessment owing substantial amounts of tax from earlier years, not to mention interest and penalties on late returns and payments.

Jointly-owned properties – who is taxed on rental income?

For properties owned jointly by spouses/ civil partners, the default position is that rental income is split equally, regardless of the actual underlying beneficial ownership of the property. There may be cases where this is not beneficial from a tax point of view, e.g. one of the members of the couple is a higher/ additional rate taxpayer, whereas the other is a basic rate taxpayer.

There may be scope to change the split to provide a more favourable result from a tax point of view, but this must be done in the correct way, and it is recommended legal and tax advice is sought.

For properties owned jointly by those not married to each or within a civil partnership, rental income is usually taxed based on their ownership shares, and so there is more flexibility.

Capital gains tax considerations

Where a taxpayer sells a property that is not their only/ main residence, they will need to consider whether they will need to submit a capital gains tax return and pay any capital gains tax due within 60 days of completion (30 days from completion for disposals between 06/04/20 and 26/10/21).

CGT will be a consideration if the property is sold for a greater value than its purchase price (or probate value, for inherited properties).

60-day CGT returns and payments only apply to residential properties, and there is no reporting requirement where no tax arises on the disposal, e.g.:

  • The property is sold at a loss or for nil gain
  • The disposal is a “nil gain/ nil loss” transfer between spouses and civil partners
  • Any capital gains are covered in full by exemptions, e.g. the annual exemption, or Principal Private Residence Relief, or by losses brought forward

If a 60-day CGT return is required, the taxpayer is required to set up a “Capital Gains Tax on UK Property” account with HMRC online, and they can opt to either submit the return(s) themselves, or authorise an agent to do it for them (e.g. their accountant/ tax adviser).

As with any other HMRC returns, penalties may be charged on those filed late, plus interest may be charged on tax paid late.

It is therefore recommended that good records are kept and that these are accessible so that the calculations can be done and the return submitted by the 60 day deadline.

If you would like further advice on tax for landlords, please contact us here.