Earning from rental properties can be enticing since it can lead to financial stability and even help you build wealth. However, just like with any income source, it’s essential to understand the tax implications involved. Understanding the details of rental income taxes is not just a smart move financially but it can avoid penalties or difficulties in the future when it comes to earning declaration time.
One of the big benefits is that it opens up opportunities to find ways to legitimately lower or even eliminate taxes on that income, which means you could end up paying very little or nothing. In this blog we will delve into the strategies and insights necessary for minimising your tax liabilities on rental income while ensuring full compliance with legal requirements.
7 Ways to reduce income tax on rental income
Below are the practical steps you, as a landlord, can implement to minimise your tax liability on rental income.
1. Utilise all available tax bands
The United Kingdom’s tax system operates on a tiered structure, with various tax bands corresponding to different income levels. The good news for landlords is that you can now deduct your rental income from your personal tax-free allowance of £12,570. It means that any rental income that does not exceed this threshold will not incur income tax.
Let’s illustrate this with an example. Consider a scenario where your total annual income from your rental activities amounts to £15,000. As long as you have no other earnings, by subtracting your tax-free allowance of £12,570, you would arrive at a taxable income of £2,430. This deduction can lead to a notable decrease in your overall tax obligation.
If you have other income sources, such as a salary, you can leverage your rental income to effectively utilise your lower tax brackets before it gets taxed at a higher rate.
2. Carry forward losses
If your rental property loses money in a tax year (meaning your expenses are higher than your rental income), you can use that loss to reduce your income tax. This is particularly helpful if you’ve had significant upfront costs, such as major repairs or gaps in your rental schedule.
For example, if you have a rental loss of £3,000 in a tax year, you can subtract that from your other taxable income, which might help lower your tax bill for that year. And if your rental losses are more than your current income, you can carry them over to future tax years and use them to offset any rental profits you make later.
3. Claim home office allowable expense
You can claim a home office allowance to reduce your tax amount on rental income by allocating a section of your residence to conduct administrative operations related to your rental properties. You might be eligible to deduct a portion of your household expenses. This includes utilities such as heating, electricity, and internet services. The specific deduction amount will be determined by the ratio of your home office space to the overall living area.
Calculate your eligible expenses by applying a flat rate corresponding to how many hours you work from home each month. If you work from home for 25 hours or more each month, you may claim a home office allowance at a simplified rate of £10 per month.
4. Form a limited company
Establishing a limited company to oversee your rental property may involve some bureaucracy, but it can also offer specific tax advantages. Limited companies are subject to corporation tax on their profits, which may be lower than the income tax applicable to rental income. As a limited business owner, your personal assets are generally protected from business debts.
Nevertheless, it is essential to seek professional advice to determine if forming a limited company is the right decision for your circumstances because it requires additional accounting and filing responsibilities.
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5. Claim allowable expenses
As a landlord, you can significantly reduce your tax liability by claiming various allowable expenses against your rental income. To qualify for this, these expenses should be exclusively and entirely related to renting out your property. Below is the list of common allowable expenses that every landlord should know.
- Fees for letting agents
- Maintenance and repair costs for the property
- Wear and tear allowance for replacing items like furniture and appliances
- Insurance for landlords
- Council tax payments
- Utility bills (if you cover them)
- Gardening expenses
- Legal fees associated with being a landlord
- Accounting fees for tax-related services
Keep detailed records of all expenses related to your rental property. You will need this information when preparing your tax return.
6. Create joint ownership
If you have a partner or family member, consider creating a joint ownership arrangement for your rental property. This can allow you to share the rental income and expenses, potentially reducing your tax liability.
However, joint ownership can also affect capital gains tax when the property is sold. It’s essential to consult with a tax advisor to understand the potential tax consequences of joint ownership.
7. Rent out to short-time tenants
If your property is in a popular tourist destination where short-term rentals are in high demand, you might want to consider renting it out for short stays. This can generate higher rental income, but it comes with its own tax considerations.
When renting your property short-term, you might qualify for the Furnished Holiday Let (FHL) scheme. This scheme has some tax perks, like a lower capital gains tax rate and possibly avoiding business rates. Remember, the rules for getting FHL status can be tricky, so getting expert advice is a good idea.
Conclusion
Are you struggling to pay taxes on your rental income? You are not alone in this. Hence, you must be thinking about how to reduce tax on rental income legally. By implementing these strategies, you can significantly reduce your income tax liability on your rental income, ensuring you do not pay more than necessary. At Bradley’s, our accountants review your tax situation regularly and seek professional advice to ensure you take full advantage of all available tax reliefs. To learn more about our services, schedule a free consultation with us.
