Understanding Landlord Tax Obligations: A Guide to Staying Compliant

When it comes to letting out property, tax is unavoidable. Landlords in the UK need to navigate their tax responsibilities, which can feel like a complicated process. However, it is essential that you stay compliant, not just to avoid penalties but also to keep your finances running smoothly.

In this article, Rogers Spencer, Chartered Accountants in Nottingham will outline some key steps that landlords can take in order to stay tax compliant and highlight why professional advice can make all the difference.

Tax compliance for landlords

The tax obligations for landlords will vary depending on the type of property that you rent out, the amount of rental income you earn, and the way in which you structure your lettings, as whether you do this personally, through a partnership or via a limited company will all have an impact. However you do it, you must remember that staying compliant with UK tax requirements is not optional.

The main taxes that UK landlords need to be aware of are:

• Income Tax on rental income
• Capital Gains Tax on the sale of a property
• Stamp Duty Land Tax when purchasing a rental property
• Corporation Tax if you operate through a limited company
• National Insurance if property letting counts as running a business (this is unusual, but still possible).

Since April 2024, Making Tax Digital (MTD) for income tax has also been applied to landlords who have a gross income of more than £50,000. This requires digital record keeping and quarterly updates to HMRC, rather than just a single annual tax return. For those who have an income ranging between £30,000 and £50,000, MTD will apply from April 2027.

Plan ahead to avoid unpleasant surprises

It has never been truer that failing to prepare is preparing to fail, so you need to make sure that you are managing your tax obligations as far in advance as possible. Property income is usually taxed after allowable expenses have been deducted, but you need to make sure that you have accurate, up-to-date records in order to claim these legitimately.

It is recommended that you set aside a percentage of your rental income each month to help ensure that you have saved enough to meet your tax bill when it is due. This could be between 20 and 40% of your income depending on your tax band and your allowable expenses.

Keeping detailed records

When it comes to tax, detailed record keeping is essential. You need to make sure that all receipts, invoices and bank statements have been carefully filed. If they refer to the rent you have received, your letting agent fees, repairs and maintenance, insurance costs, utility bills (if you are responsible for them), ground rents and service charges, and any advertising costs associated with finding tenants then they should all be carefully recorded.

Not only will these accurate and detailed records make completing your tax return much easier, but they will also ensure that you can defend any claims if HMRC decides to raise an enquiry.

It is also important to remember that the £1000 property allowance that was introduced in 2017 allows you to earn up to £1000 of tax-free rental income without needing to register for Self Assessment. However, any landlords earning above this threshold will still need to file.

Keeping up to date

The last 12 months have seen a new government take charge and this means that tax obligations and laws affecting landlords can change frequently. It is therefore essential that you stay informed, so that you can plan accordingly and remain compliant with your obligations. Remember, ignorance is not a defence.

One of the important changes that you need to be aware of is the Capital Gains Tax annual exemption for individuals being reduced down to £3000 from the previous £6000. It is also important to remember that although energy efficiency requirements have been temporarily paused, upcoming rules will mean that landlords have to meet minimum EPC ratings for rental properties.

There have also been some significant stamp duty reforms, so you should check your current thresholds if you are purchasing additional properties as the 3% second property surcharge will still apply.

Changes to Inheritance Tax are also likely to change the plans for some landlords who may have seen their property portfolio as a legacy to pass down to other family members.

The value of professional support

There is no doubt that managing tax compliance as a landlord can become complicated and overwhelming very quickly, particularly if you have a number of different properties holiday lets, or properties under different legal structures.

In order to save time, money and stress you should consider working with a specialist property accountant or tax advisor who can help you to accurately calculate your tax liabilities, identify all allowable expenses and deductions, keep you compliant with MTD requirements, plan for future tax bills, and minimise tax legally through efficient structuring.

By investing in expert advice, you could retain more of your rental income and avoid some very costly penalties.

The risks of non-compliance

Whilst it might seem as though you have a lot to manage when it comes to your tax obligations, landlords need to be aware that failure to comply with this can have some very serious consequences.

For example, any late filing or payment of your Self Assessment return can result in automatic penalties that start at £100 and increase with time, interest charges on unpaid tax and HMRC investigations, which can be both stressful and expensive. If you are found guilty of deliberate tax evasion, then it may result in prosecution.

As well as the financial penalties, non-compliance can also be responsible for damaging your reputation with tenants, lenders and professional bodies which can have a massive impact on your future in property investment. By keeping your tax affairs in order, you can protect your business as well as building trust with stakeholders and have better peace of mind.

Landlords who stay on top of their tax obligations don't just tick legal boxes, but they also protect their income, their reputation and their long-term investment strategy. If you are unsure about any of your tax obligations, then speak to a qualified property tax advisor to keep you one step ahead.