Like landlords across the UK, people who rent out property in Scotland need to pay tax on their rental income. You need to register for self-assessment and file a tax return so HMRC can calculate the tax you owe.
While you must pay tax on your rental profits, the size of your tax bill will depend on your entire income. You may, however, be able to reduce the amount of tax you pay by offsetting some of the expenses that come with renting out property.
To help you understand what can and can’t be claimed as allowable expenses, we look at the basics of tax and self-assessment for landlords in Scotland.
What tax do landlords in Scotland need to pay?
Landlords pay income tax on the profits they make from renting out property. How much you pay depends on your income – from being a landlord, but from other sources too.
It’s worth noting that the Scottish Parliament sets its own income tax thresholds, which are different to the rest of the UK – the Scottish rate of income tax (SRIT).
What you need to know:
- Currently, the personal allowance in Scotland is £12,570 – you won’t pay tax on money you earn up to this level.
- In Scotland the first tax band, or starter rate, applies to people who earn between £12,571 and £14,667. The starter rate is set by the Scottish government at 19% and doesn’t exist elsewhere in the UK.
- The basic rate (currently 20%) applies to income from £14,668 to £25,296.
- The intermediate rate of 21% applies between £25,297 and £43,662 – this is also unique to Scotland.
- Higher rate taxpayers, who earn £43,663 to £150,000, pay tax at 41%.
- The top rate, for people who earn £150,000+, is 46%.
- Taxpayers earning over £125,140 do not get the £12,570 personal allowance.
- These rates currently apply during the 2022/23 tax year – but always check the gov.uk website for the lates figures.
If you’re new to self-assessment you must register for the service by 5 October, after the tax year when you received the income.
You must file your tax return online and pay your tax by 31 January the following year (or the previous 31 October if you wish to submit a paper return).
Landlord tax allowances
Landlords across the UK can also claim a further allowance of £1,000 for income made exclusively from property. So, even if you have earned more than your personal allowance during a tax year, the first £1,000 of your property income can be discounted. If you earned between £1,000 and £2,500 from rental income you should contact HMRC.
What costs can landlords offset against their income as allowable expenses?
Landlords may be able to reduce their tax bill by claiming for certain allowable expenses incurred as a result of renting out property. The expenses must be exclusively related to the day-to-day management costs of the tenancy and be things which don’t add value to your property.
Allowable expenses include:
- Professional fees – including letting agent and accountancy fees.
- Insurance – landlord buildings, contents, public liability and other policies.
- Fees and charges – ground rent, service charges and cleaning and gardening.
- The cost of advertising your property for rent.
- Mobile phone calls, postage and stationery, but only if they are directly used for your property business.
- Maintenance and repairs – but not improvements to the property.
- Council tax, gas and electricity – if you pay for these and include the costs in the rent. You can’t claim for utility bills if your tenant pays them direct.
- Mileage – if you use your car for your property business.
What expenses aren’t allowable?
You can no longer claim the interest payments on your mortgage as an allowable expense. New rules, which came into force in April 2020, mean you now receive a tax-credit, based on 20% of your mortgage interest payments.
You can’t claim capital investment as an allowable expense. This means improvements that add value to your rental property – so the cost of renovating a property in the first place or adding extensions or loft conversions wouldn’t be classed as allowable expenses.
Repairs v capital expenditure
What counts as a repair, and what is capital expenditure item can be a grey area. According to HMRC, a repair restores an asset to its original condition, sometimes by replacing part of it. So, repairs could include:
- Replacing roof tiles
- Installing a new boiler, if the old one isn’t working
- Decorating the property between tenants if the paintwork needs a refresh.
Although upgrades can’t usually be claimed for, replacing something with the nearest modern equivalent is still counted as a repair by HMRC – eg replacing a single-glazed window with a double-glazed one.
If you received a pay-out for a broken item from your landlord insurance policy, you can only claim any for any additional costs that you incur, as an allowable expense.
Relief for replacement of domestic items
If yours is a furnished property, you can claim tax relief on replacing domestic items. The items covered include furniture, curtains and moveable electrical appliances such as washing machines, TVs and fridges. To claim this tax relief, you must be replacing an existing item, not furnishing the property in the first place.
In addition, the items must be for your tenants’ use and you must remove the old ones. You may only claim for the reasonable cost of a like-for-like replacement – not an upgrade – plus any cost of disposing of the old item.
If you’re confused about tax and allowable expenses, or any other aspect of renting out property in Glasgow, we’re here to help. Give us a call today to discuss our range of management services.