As a landlord, you’re expected to pay income tax on any rental income you earn from your properties. While tax is an inevitable part of life, our handy guide will ensure you are aware of your financial responsibilities, whilst advising how to reduce the tax you pay on your rental income by being as efficient as possible.

You may be a professional buy-to-let landlord or an ‘accidental landlord’ if you have inherited a property. With low interest rates predicted to remain low in the coming years, increased rental profits can also mean an increase in rental income tax.

Here at Leon & Company, we are often asked about how to ensure you’re not paying more tax than you are actually liable for.

Whichever category you fall into, you will be liable for both rental Income Tax and Capital Gains Tax (CGT) if selling a property, but there are ways you can make sure that your tax payments are as efficient as possible and to avoid paying additional costs.

How to minimise rental income tax

Rental Income Tax

As rental income is the income you gain from your tenants, it can also include payments for things like:

  • Hot water and heating
  • Electricity costs
  • Repairs
  • Use of furniture

The amount of rental income you pay tax on depends on your personal circumstances and how much profit you make.


Capital Gains Tax

You only have to pay capital gains tax when your overall gains are above the tax-free allowance (also known as the Annual Exempt Amount). You can find out the current tax-free allowance here.

As a landlord, you may be liable for CGT if you sell a property that isn’t your main home, if it is used as a business premises or if you let it out. A property tax accountant can help you navigate your rental property tax bill.


Make The Most Of Your Landlord Expenses

A landlord is eligible for several types of tax relief regarding their rental property, which can be deducted as allowable expenses from rental income. When you submit your tax return, you can claim for some or all of the following:

  • Mortgage interest payments*
  • Maintenance and repairs costs
  • Marketing
  • Ground rent
  • Letting agent fees

The above is by no means an exhaustive list of available tax relief. Part of our role is to identify qualifying expenditure to offset expenses against your rental income.

*Please note that the mortgage interest payments are subject to a potential “Section 24” restriction depending on your tax band. This is something that our team here at Leon & Company can advise on.


Seek Expert Advice

An accountant knows the ins-and-outs of your property tax bill and can apply this in-depth knowledge to the complexities of an individual and their rental income. Whereas online research can be a helpful guide, advice from your accountant will ensure you pay tax efficiently and can therefore identify opportunities to reduce the tax you pay on your rental income tax bill where possible.


Set Up A Limited Company (A ‘Special Purpose Vehicle’ – SPV)

This strategy is not for everyone, though it does have the potential to create big savings for landlords.

In recent years, almost half of landlords have formed a limited company to purchase a new rental property. This potentially allows landlords to avoid reductions in landlord tax relief and off-set a buy-to-let mortgage interest against profits, which are subject to Corporation Tax, rather than higher individual income tax rates.

This route also addresses the potential “Section 24” mortgage interest restriction which can be a heavy tax burden for landlords who hold property in their own name rather than a company.

It also gives the landlord far greater control over how they remit profits to themselves, thus providing greater opportunity for more effective tax planning.

However, there are costs involved in making the switch. A property expert or accountant can guide you through the process. They can also advise on whether this is the best option for you.


File Your Tax Return On Time

Simple advice can make a huge difference. Avoid unnecessary fines by getting your tax return in on time. You must notify HMRC and declare rental income by 5 October after the end of the tax year on the 5th April and fill in a self assessment tax return. The deadline for making a paper tax return is 31 October. For an online return the deadline is 31 January the following year.


About Leon & Company

We know that the right decisions can save our clients significant amounts of cash when it comes to rental business. When we’re asked about how to reduce tax on rental income, we use our years of knowledge and experience to help reduce your tax bill and make efficient use of the tax relief available to you, such as identifying allowable expenses. Our chartered accountants in Leeds have been supporting clients for over 35 years, from start-up businesses to seasoned property business owners.

Any questions? Contact us now!