Taxation rules for landlords (2022 Update)

That includes when you purchase the property, when you let it, and when you sell it.

Navigating property tax rules can be difficult for both seasoned and new landlords, mainly as they are updated regularly and seen as rather complex.

If you're unsure about your tax obligations or wish to know the current rules, we've developed a comprehensive guide to keep you informed of what is undeniably an elaborate system.

When letting out a property, you must contact HMRC if your income from rental profit is between £1,000 and £2,500 a year, and they will work out your tax bill accordingly.

You must complete a Self Assessment tax return if your income is between £2,500 and £9,999 after allowable expenses. You can check the government's online tool if you are unsure or need assistance.

From April 2017, you are entitled to a property allowance if your combined rental income from UK, overseas and commercial property falls under £1,000 before expenses. No income tax is required, and there is no need to register with HMRC or file returns. However, some exclusions could affect your eligibility, so it's best to seek advice beforehand.

Letting is a business, so any profit you make from renting is part of your income and, as such, is subject to income tax.

The amount you pay depends on your total taxable income. For instance, if you pay the basic tax rate, you will pay 20%, but if you are a higher rate taxpayer, it's 40%. It's important to note, however, that tax rates are different in Scotland.

The current rate is as follows:

You may also be eligible to claim income tax reliefs, meaning that you either pay less tax to account for the money you've spent on specific items or get your tax repaid. Some tax reliefs are applied automatically, but there are others you must apply for.

Creating a separate account for your rental income is good practice for calculating your costs. Doing this will allow you to quickly work out your profit, expenses, and other forms of income.

It's crucial to remember that only profits from renting your property are liable for income tax and that to calculate your profits, you'll have to deduct 'allowable expenses' first.

Letting activity can be deemed as 'running a property business' and may require you to pay National Insurance Tax.

'Running a property business' applies if being a landlord is your primary job, you let more than one property, or you acquire properties with the intention of renting them out.

You will need to pay this tax if your profits are over £6,725 per year. If they are under this figure, you can make voluntary National Insurance payments which contribute towards you being entitled to the full state pension. Class 2 and Class 4 National Insurance can be paid through Self Assessment.

As of April 6 2022, National Insurance Contributions have increased by 1.25 percentage points.

From April 2016, anyone purchasing a second home or buy-to-let investment is required to pay an additional 3% in Stamp Duty Land Tax.

The rates for additional properties are as follows:

In July 2020, the government introduced a stamp duty holiday in response to the Covid-19 pandemic. Buy-to-let landlords who purchased a property during this time saved an average of £2,000.

The tax holiday was in effect until October 2021, when the stamp duty rates returned to normal. Landlords were again required to pay standard stamp duty land tax rates, plus the 3% surcharge for second homes and buy-to-let properties.

To work out how much the additional 3% will cost you, this stamp duty calculator is a helpful tool.

If you're an overseas investor, an expat returning to the UK, or investing here, you may also face an extra 2% stamp duty surcharge on top of the 3% for second homes and the normal stamp duty rates. This measure was introduced in April 2021.

Capital Gains Tax must be paid when a landlord sells (or disposes of) a property that has increased in value. The tax is only payable on properties that aren't the owner's main residence.

To work out the gain, you must deduct the price you bought the property for from the total you are selling it for. You can deduct costs such as agents' or solicitors' fees and the costs of improvement works.

However, you cannot deduct items considered a revenue expense, such as council tax, which may be payable by a landlord during void periods. It is not a capital expense and, therefore, cannot be treated as a deduction for capital gains tax purposes. It is, however, a revenue expense deductible from rental income.

Once you've worked out your gain, you can find out how much CGT you need to pay by using this calculator.

Previously, landlords who rented out a property that was once their main home could claim lettings relief of up to £40,000, subject to certain restrictions. However, this ceased to be available from April 2020.

Furthermore, when a property had been used as the main home at any time during ownership, the final 18 months of ownership were deemed exempt from capital gains. This exemption was restricted to 9 months from April 2020.

In October 2021's Autumn Budget, it was announced that landlords now have 60 days to report and pay capital gains tax when they sell a property. This is double the previous 30-day period, although it remains well below the maximum 22-month period that was in place before April 2020.

There was speculation that the government would increase capital gains tax rates, but there is still no sign of change.

If you complete your Self-Assessment tax returns online, you get an extra three months to submit them. The deadlines for online and paper tax returns are listed here, where further information about the current tax year is also available. The site also provides helpful guidance regarding how you complete your tax return. You must complete your tax return accurately, within the relevant timeframes; otherwise, you can face penalties. You can find the nature and severity of such penalties on the charity Tax Aid's website.