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Accidental Landlords Taxes: A Complete Guide

Published by Susan Basnet
Posted Date: June 10, 2024 , Modified Date: June 11, 2024
Categories: Landlords

Picture this: You inherit a property from a relative who has recently moved into a nursing home and  face the dilemma of selling the property due to rising management costs. Choosing to rent out the property instead of living in or selling it transforms you into an accidental landlord. It might sound unusual, but many find themselves in this situation.

This article unravels the unique journey of accidental landlords, starting with their obligations. Walk with us through the complexities, unravelling the responsibilities that come with this unique status.

Obligations of Accidental Landlords

As accidental landlords embark on their unforeseen journey into property management, it is crucial to recognise that their role comes with a set of obligations that mirror those of experienced landlords.

In this segment, we explore the obligations commonly shared by accidental landlords.

  • Right to Rent: As an accidental landlord, you must verify that prospective tenants possess a legal right to rent in the UK. The process involves checking the original documents and confirming their right to rent in the UK.
    (Failing to do so may lead to civil or criminal penalties!)
  • Safety Checks: You must ensure the property is safe for your tenants. As a part of this, you need to carry a ‘gas safety check’ and checks on appliances.
  • Tenancy Deposit: You must keep the deposits from tenants in one of the government-backed tenancy protection schemes: My Deposits, Tenancy Deposit Scheme and Deposit Protection schemes. The deposit must be placed within 30 days of receiving the rent.
  • Insurance: There is no legal obligation to have insurance on your home, but it is advisable to have one, simply because – it is better to be safe than sorry! Also, your mortgage lenders are unlikely to be happy moving forward without insurance on your property.

Mortgage Options for Accidental Landlords

Mortgage Options for Accidental Landlords

If there is a mortgage on your home, you must notify your present mortgage lender of your changed circumstances to obtain permission to rent out your house. Your options include:

Obtaining ‘Consent to Let’

Obtaining ‘consent to let’ is a process where the current mortgage lender allows the property to be rented without changing the mortgage terms. This option could be helpful in the short term. For example, if you are locked into a fixed-term mortgage deal and need to move out but can’t sell your property.

Switching to a Buy-to-Let Mortgage: 

If the former option does not suit you or your mortgage lender, you can switch to a buy-to-let mortgage.

Dive deeper into this by checking out our article on, "Buy-to-Let Mortgage".

Income Tax on Rental Income

Like any other property letting businesses, the rental income from the letting of the property is subject to income tax, and the specific amount depends on your overall income and your tax-paying band.

There are several expenses you are allowed to deduct from your rental income, including:

  • General Maintenance and Repairs
  • Insurance Costs
  • Water Rates and Council Tax
  • Legal Fees and Management Fees

However, there are several expenses you cannot claim a deduction for, including:

  • Enhancements to the Property
  • Mortgage Interest (see below)
  • Private Telephone Calls
  • Personal Expenses

The final taxable amount will be subject to income tax based on your tax bracket.

Tax Reliefs for Accidental Landlords

Tax Reliefs for Accidental Landlords

As an accidental landlord, you might be eligible for several reliefs and allowances. Such reliefs and allowances can reduce your tax liability to some extent. In this segment, we will delve into such reliefs in detail.

Replacement Domestic Item Relief

 When a domestic item provided to the tenant by the landlord is replaced, an accidental landlord may be able to claim the replacement domestic item relief. The relief is applicable to domestic items, including moveable furniture, furnishings, and kitchen wares.

The relief here is the difference between replacement cost and any proceeds on the disposal of the original item. Additionally, the replacement cost is restricted to the cost of a similar item, excluding any improvements.

An example demonstrating how the relief works:

For Example, 

Chris is an accidental landlord and lets his property partly furnished. The fridge in one of the properties has to be replaced and he decides to replace it with a fridge-freezer which costs £700. If Chris had bought a fridge, which is the modern equivalent of the old fridge, it would have cost him £400. If he sold his old fridge for £50, his allowable relief would be calculated as follows:

Cost of fridge (modern equivalent)

£400

Less: Disposal proceeds of the original item

(£50)

Allowable Relief

£350

Property Allowance

The property allowance is a tax exemption of up to £1,000 a year for individuals with rental income. If a property is jointly owned, each individual is eligible for the £1,000 allowance against their share of rental income.

It should be noted that property allowance cannot be used if the basic rate relief on finance costs has been claimed.

Rent a Room Relief

Another relief that might be applicable to an accidental landlord is the rent-a-room relief. Under this scheme, a tax exemption of up to £7,500 is provided to individuals with income from property.

To be eligible for the relief, an accidental landlord must have let out a furnished accommodation in their residential home.

Basic Rate Relief on Finance Costs – Individual vs Companies 

Beyond the above discussed reliefs and exemptions, Accidental landlords can claim tax relief on mortgage interest payments. This is a deduction given at a rate of 20% – regardless of the individual’s tax band. Therefore, if you are a higher-rate taxpayer, you will pay tax on rental income at 40% or 45% but can only claim 20% back as tax relief.

Basic Rate Relief on Finance Costs – Individual vs Companies

Contrary to individual landlords, limited companies may fully deduct their mortgage interest. Considering this advantage, incorporating your properties into a limited company may be a strategic move.

For further understanding, refer to our article on the, "Benefits of incorporating properties into a limited company".

Let’s compare how mortgage interest is treated for individuals and companies with the following table:

Header

Company

Individual

Particulars

Amount (In £)

Amount (In £)

Turnover/Income

1,000,000

1,000,000

Less: Operating Costs

(250,000)

(250,000)

Less: Administrative Costs

(15,000)

(15,000)

Less: Mortgage Interest

(50,000)

-

Taxable Amount

685,000

735,000

Tax Liability
     -Corporation Tax @25%
     -Income Tax Liability*

171,250

316,953

Less: Tax credit relief on mortgage interest (20% of 50,000)

-

(10,000)

Final Tax Liability

171,250

306,953

*Income tax liability for individuals is calculated on three separate bands, as follows:

Income (£)

Tax Rate

0-37,700

20%

37,700 - 125,140

40%

Above 125,140

45%

The initial £37,700 @ 20%, next £87,440 (125,140-37,700) @40%, and the remaining £609,860 is taxed@45%

As the income exceeds £125,140, no personal allowance is available.

If you’re still struggling to understand how the relief works for individuals and companies, explore our complete guide on the basic rate relief (unpublished).

Self-Assessment Tax Return Registration

The taxable rental income is disclosed to the HMRC via a self-assessment tax return. Therefore, the first thing you need to do, as an accidental landlord, is register for self-assessment with HMRC (if you are not already registered). You can do this yourself online.

After registering, you will get your Unique Taxpayer Reference (UTR) by post in 10 working days. You can then sign into your personal tax account to activate your
self-assessment.

Self-Assessment Tax Return Submission

Your self-assessment tax return must be completed once a year by the 31st of January to cover the financial year up to April of the previous year.

The deadline for the landlord to submit a paper return is the 31st of October of the following tax year and the 31st of January if the landlord submits an electronic return online.

Further Tax Implications

Further Tax Implications

Moving beyond income tax, accidental landlords encounter further tax implications that demand attention. In this segment, we’ll look at those, concentrating on the ones that are more important:

Stamp Duty Land Tax (SDLT): 

SDLT is the tax imposed on the purchase of land and properties in the UK. If you’ve become an accidental landlord and go on to buy a property that you plan to live in (and you have already owned a house before), you’ll pay the additional 3% surcharge on stamp duty:

Purchase Price

SDLT Rates

3% Surcharge

Up to £250,000

0%

3%

£250,001 to £925,000

5%

8%

£925,001 to £1.5m

10%

13%

Over £1.5m

12%

15%

The additional surcharge applies to the purchase of a property for more than £40,000.

Stamp Duty Land Tax (SDLT) Calculator

Determine your payable SDLT using our easy-to-use SDLT Calculator.

Capital Gains Tax (CGT):

CGT is the tax levied on the overall gain on the sale of a capital asset. CGT is not applicable if you keep and rent out the property. However, if you sell a rental property that is not your primary residential home and has risen in value, you must pay CGT on the overall gain.

For 2024/25, you do not pay CGT on gains up to the annual exempt amount of £3,000. Capital Gains Tax (CGT) is currently levied at a rate of 18% for basic rate taxpayers and 24% for higher rate taxpayers.

It should be noted that landlords must report and pay CGT on the sale of residential property within 60 days of the sale.

For example, 

Jesse, with an annual income of £25,000 after deducting her personal allowance, makes a disposal of a residential property in the year tax year 2024/25, realising a taxable gain of £347,000; her CGT will be calculated as:

Particulars

Amount (£)

Sales proceeds

1,000,000

Less: purchase costs

(600,000)

Less: enhancement costs

(50,000)

Chargeable gain

350,000

Less: Annual exempt amount

(3,000)

Taxable gain

347,000

CGT at 18% (18% of 12,700)

2,286

CGT at 24% (24% of 334,300)

80,232

Total Capital gains tax liability

82,518

Conclusion:

Managing a rental property as an accidental landlord is both rewarding and challenging. It offers an additional income stream but also comes with various responsibilities, from safety checks to tax obligations. To navigate these responsibilities effectively, staying informed about tax regulations is essential. This knowledge helps you make informed decisions and ensures a successful rental property experience.

Need more property tips as a Landlord?

Contact us today for efficient and
hassle-free assistance.

Susan Basnet
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