Self-assessment Tax Returns: What you should be considering before 31st Jan 2023
Rental income should be treated as income and is taxable, and if you are a new landlord receiving rental income for the first time, you need to declare it. This is especially important (and can be a bit scary) if you have never completed a tax return and have always paid income tax through PAYE.
We are here to help.
The deadline for submitting your self-assessment tax return online is 31st January 2023 so it's something that you need to consider now. If you earn less than £1,000 per year, you do not need to report it to the HMRC. The first £1,000 forms your “property allowance," so is tax-free. However, once your earnings are over £1,000 it must be declared. Remember: you need to register for online self-assessment by the end of October in the year you start collecting rental income.
The first step is to prepare your income and expenditure over the tax year (to include April – 5th April following year).
Get your paperwork together so you have a detailed breakdown of your rental income collected throughout the tax year – this might be from individual monthly statements or you may be able to get an annual report. This will form the basis of your income section.
More complicated is the expenditure section – what can you claim for? Breakdown your expenses over the year into the following:
- Insurance cost (buildings, contents, rent insurance)
- Ground rent if applicable on leasehold
- Council Tax paid if property empty (rates)
- Utility Bills if empty
- Repairs and Maintenance Costs – any costs associated with fixing something that was broken are allowed – so the broken tap washer repair isand allowed, the boiler repair is allowed in full, however, you must be careful if something is not just “fixed” but is upgraded, as this may be deemed a capital expense (more to follow)
- Legal fees or costs associated with the rental property
- Agency fees
- Factoring or service charge costs
- Wages associated with the property rental (if any)
- Your costs for travelling etc to the property can be offset too
NB: You cannot claim any loss or deduction for actual allowable expenses if you elect to use the property allowance. Contact your accountant for expert guidance, or visit gov.uk/renting-out-a-property/paying-tax.
Can I offset my mortgage finance costs?
Since April 2020, you can no longer deduct any of your mortgage expenses from your rental income to reduce your tax bill.
Instead, you now receive a tax-credit, based on 20% of your mortgage interest payments compared to the previous rate of 40%.
The new system means higher or additional-rate taxpayers can no longer claim the tax back on their mortgage repayments, as the credit only refunds tax at the basic 20% rate, rather than the top rate of tax paid.
The new rules could take some landlords into the next tax bracket, because they'll need to declare the income that was used to pay the mortgage on their tax return.
Repairs versus Improvements – what’s the difference?
An allowable expense for rental property is something deemed as a repair, not an improvement; that would be a capital allowance that you would claim for when you sold the property.
So, if you replace a broken washing machine with a new machine, that’s fine, it can be claimed as an expense. If you replace a broken boiler with a similar type, it can be claimed.
However, in the extreme, you can’t claim for the extension which you added on that year, that would be a capital allowance. And more likely, you will be on shaky ground if you replace the cheap laminate worktops in the kitchen with a bespoke marble substitute and claim the full amount. It's about replacement versus improvement. Things like windows are interesting, you can now claim for replacing a faulty single-glazed window unit with a double-glazed one, as double-glazing is now “the norm” and it's not seen as an improvement.
All records need to be kept for 5 years, so be organised and keep your records tidy!