Landlords must declare their rental income to HMRC and pay tax on any profit made by the property rental business.
The profit can be calculated by deducting allowable expenses from rental and other income of the property business. However, where it is beneficial to do so, the landlord can claim the property allowance of £1,000 and deduct this instead of actual expenses. This will work in the landlord’s favour where actual expenses are less than £1,000 (unless there is a loss to preserve).
Making Tax Digital
From 6th April 2024, MTD for Income Tax will apply to all landlords whose total property and/or business income is above £10,000 per year.
Landlords will need to use software to:
• Keep digital records of their income and expenses
• Send quarterly updates to HMRC
• Finalise their income and submit an end of period statement (EOPS) and final declaration (which will replace the annual Self Assessment tax return) to HMRC
To calculate profits (or losses) accurately, the landlord must keep records.
For all properties in the property rental business, a record should be kept of:
- the dates on which the property was let;
- rental income received;
- any income from services provided to tenants (for example if the landlord undertakes maintenance or repairs and bills the tenants for this); and
- any other income, for example from the sale of domestic goods for which replacement relief is claimed.
The landlord should also keep supporting documentation, such as rent books, invoices and bank statements.
The landlord will also need to keep a record of expenses. Expenses can be claimed to the extent that they relate wholly and exclusively to the letting out of the property. Examples of expenses which typically may be incurred by a landlord include:
- agents’ fees
- advertising costs
- wages of staff
- repairs and maintenance
- replacing domestic items
- landlords’ insurance
The landlord should keep a record of all expenses incurred, and also supporting documentation, such as invoices, agents’ statements, bank statements, receipts, etc.
Where the property allowance is claimed instead, the landlord does not need to keep records of actual expenses. However, it is useful to do so in order to check whether claiming the allowance is beneficial, and also from a business perspective.