A UK LANDORD WITH A UK RESIDENTIAL UNFURNISHED PROPERTY Post 3 of 5
Running a property business
So, you have a residential property that you are looking to rent out, this makes you a landlord and with that comes responsibilities.
One of these responsibilities is a financial one
In that you must pay Income Tax on your rental income after your day-to-day running expenses have been deducted.
If you are not classified as running a business then you do not pay National Insurance – even if you do things like arranging repairs, advertising for tenant’s and arranging tenancy agreements.
If the work you do renting out property counts as a business that you must pay Class 2 National Insurance.
If your profits are £6,475 a year or more and if all the following apply you are deemed to be running a business
· Being a Landlord is your main job
· You rent out more than one property
· You are Buying new properties to rent out
Therefore, you will have to pay Class 2 National Insurance, if your profits are under £6,475 you can make voluntary Class 2 National Insurance contributions. A reason for doing this is to make sure you get a full State Pension.
You will pay Class 4 National Insurance, if your profits are £9,501 or more a year
How much you pay
Rate for tax year 2020 to 2021
Class 2 £3.05 a week
Class 4 9% on profits between £9,501 and £50,000 2% on profits over £50,000
How to pay
Most people pay Class 2 and Class 4 National Insurance through Self Assessment.
Property you personally own
The first £1,000 of your income from property rental is tax-free. This is your ‘property allowance’.
If you are claiming the property allowance you are unable to deduct any allowable expenses. Even if you have more than one property the total property allowance cannot exceed £1,000. The property allowance is unable to be claimed if any of the property income is from a connected party such as a family member.
If you are claiming Rent A Room relief then you are unable to claim the property allowance.
You must pay tax on any profit you make from renting out property. How much you pay depends on:
how much profit you make
your personal circumstances
Your profit is the amount left once you’ve added together your rental income and taken away the expenses or allowances that you can claim.
You must contact HMRC if you have taxable profits from your property you rent.
If you’re also employed and your rental profits are small enough, you can ask HM Revenue and Customs (HMRC) to deal with your profits by adjusting your PAYE code.
Contact HMRC if your income from property rental is between £1,000 and £2,500 a year.
You must report it on a Self Assessment tax return if it’s:
£2,500 to £9,999 after allowable expenses
£10,000 or more before allowable expenses
If you do not usually send a tax return, you need to register by 5 October following the tax year you had rental income.
Whether you need to fill in a tax return will depend on the total rents you get and the profit you make. It will also depend on any other income you’ve had or may get, for example, from employment or pensions.
If HMRC ask you to send in a tax return you must give details of your rental income and expenses for the tax year even if you’ve no tax to pay.
If you’re not registered for Self Assessment
If you don’t usually send a tax return, you need to register for Self Assessment by 5 October following the tax year you had rental income. If you don’t, you could be charged a penalty.
There are different ways to register if you’re:
self-employed or a sole trader
a member of a partnership
You should allow enough time to complete the registration process so you can send your return by the deadline.
For details regarding registering for self-assessment then look at our previous blog
11 STEPS TO SETTING UP AS A SOLE TRADER (SELF-EMPLOYED) - Post 5
ITEMS TO DO BEFORE TRADING Cont'd
6. REGISTER FOR SELF ASSESSMENT TAX RETURN
Declaring unpaid tax
You can declare unpaid tax by telling HMRC about rental income from previous years. If you have to pay a penalty it’ll be lower than if HMRC find out about the income themselves.
You’ll be given a disclosure reference number. You then have 3 months to work out what you owe and pay it.
Do not include the £1,000 tax-free property allowance for any tax years before 2017 to 2018.
Working out your profit
You work out the net profit or loss for all your property lettings (except furnished holiday lettings) as if it’s a single business. To do this, you:
add together all your rental income
add together all your allowable expenses
take the expenses away from the income
Work out the profit or loss from furnished holiday lettings separately from any other rental business to make sure you only claim these tax advantages for eligible properties.
Making a loss
If the allowable expenses are greater than your rental income you will have made a loss.
Deduct any losses from your profit and enter the figure on your Self Assessment form.
You can offset your loss against:
future profits by carrying it forward to a later year
profits from other properties (if you have them)
You can only offset losses against future profits in the same business.
When you stop renting property
When your rental business ends, any losses that have been carried forward are usually lost as they can’t be set against any other income. If you start to rent out property again within 3 years you will usually be able to set earlier property losses against any profits from the new property.
You can share ownership of rental property with other people but how the rental income is taxed will depend on your share of the property.
Income Split: Is It Always 50/50?
Not necessarily. If a married couple or a civil partnership "Jointly" own a property ("Jointly" being a legal definition), HMRC will treat the beneficial ownership as 50/50 by default (ITA 2007, Section 836). If the married couple or civil partners require a different proportion each, say 80/20, this is possible by preparing legal documents to change the beneficial ownership. This is permitted by ITA 2007, Section 837. A change in beneficial ownership is an acquisition by one person and a disposal by the other, so Capital Gains Tax could potentially be a factor at the time of change or some further disposal point in the future. Transfers of assets (outright gifts) between spouses or civil partners are nil gain / loss (TCGA 1992, Section 58). For an ITA 2007, Section 837 election, it will be necessary to change the ownership to "Tenants in Common". Also, because the actual share of a property (as tenants in common) is not on the title deeds, the new revised share should be recorded by a "Declaration of Trust", signed by the parties and recorded at the Land Registry. HMRC are then informed of this change using Form 17. The Form 17 does not change anything, it is just the method of informing HMRC. Form 17 must be submitted with 60 days of the "Declaration of Trust". A Section 837 election can only be made where the beneficial interests in the income and capital are the same. A married couple or a civil partnership can choose a different split for each property. A Section 837 election is not permitted for partnership income and income from furnished holiday lettings. Property jointly owned with spouse or civil partner
Property jointly owned by married couples and civil partners who live together will be taxed in equal shares, unless you decide to split ownership differently.
If you own the property in different shares, you can use a different split. If you own the property in unequal shares, and are entitled to the income in the same unequal shares, the income can be taxed on that basis. You both need to notify HMRC.
Property jointly owned but not with a spouse or civil partner
If you own a property jointly with another person who isn’t your spouse or civil partner your share of the rental profits or losses will usually be based on the share of the property you own
If a property is owned jointly by two people who are not married or in a civil partnership, then the property income and profit can be split however they agree, and this split must be consistent with what they submit to HMRC. The share of income and profit need not be the same as the equity/ownership share. The HMRC document which covers this PIM 1030. Having the agreement in writing would be advisable.
We recommend that a solicitor is engaged for the Declaration of Trust, and the Land Registry changes.