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The tax implications for accidental landlords.

05 Apr 2022 | 3 min

Sometimes life takes you in unexpected directions.

Maybe you've inherited a property much sooner than you'd anticipated, or your job is forcing a relocation but your home just won't sell. Like many homeowners, you might find yourself becoming an ‘accidental landlord’: letting out a property when you didn’t 'buy to let'.

While it’s a great way to cover your mortgage payments – particularly important if you’ve got a mortgage on another house or are having to pay rent – it does come with some implications, namely tax.

Do accidental landlords have to declare rental income?

You do – you’ll need to complete Self Assessment through HMRC every year, even if you pay tax through PAYE for your day job. If the taxman discovers you’ve been renting your house out and not paying tax on the income, you could face a hefty fine or even a criminal conviction.

What tax do I need to pay as an ‘accidental landlord’?

Until fairly recently, landlords could claim tax relief on the interest they paid on their mortgage payments - meaning they only paid tax on any profit they made after paying their mortgage, and the amount they'd pay would depend on which income tax bracket they fell into.

But now landlords now have to pay tax on all their income from rent, not just the profit. That means you'll pay 20%, 40% or 45% of your rental income as tax, depending on what you earn elsewhere.

Once you've calculated your tax obligations, you can claim tax relief at a flat rate of 20% - regardless of the income tax band you fall into.

Can I claim tax back against anything as an accidental landlord?

Renting a house out comes with some costs, like letting agents’ fees, any bills included in the rent, cleaning or minor updates, and you can claim these as expenses to offset the amount of tax you pay. You can also claim tax relief on any items you buy, like white goods, furniture or replacement carpets. An accountant can help you identify expenses incurred throughout your life as a landlord, which can help reduce your taxable income.

What happens if I later sell my house?

Any property that’s been rented out is subject to Capital Gains Tax (CGT), the profit you’ve made on a capital asset. Since April 2019, you’ve be expected to pay this within 30 days of selling the property.

If the property you're renting out was once your main residence, you won't pay Capital Gains Tax on the total increase; instead, a calculation is made based on how long you lived in it, plus an additional 9 months.

The calculation works on the assumption that the increase in value has been steady throughout your ownership, as you may (understandably) not have had a valuation on your property at the point when you began renting it out.

When do I have to declare my rental income for tax purposes?

At the moment, tax returns need to be completed once a year – by January 31st, to cover the financial year up to April of the previous year.

The Government's Making Tax Digital scheme may eventually require those using Self Assessment to declare their income digitally every quarter, so you can keep tabs on how much tax you might owe (rather than finding yourself with an unexpected bill at the end of the year). At the time of writing, this scheme is being piloted.

Any property used as security, including your home, may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.

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All content factually correct at the time of publishing.

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