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Rental income, deposits and tax

If your property is split into purpose-built flats, with the landlord and tenant in different flats, or you as landlord do not live in the same property as your tenant, and the tenancy began after 15 January 1989, you may have an assured or assured shorthold tenancy. You may have a regulated tenancy if the tenancy began before that date. See 'Types of tenancies - private renting' for more information on the different types of tenancies.

If you let a property, you will usually be charged Income Tax on the rent you receive. The amount of tax you have to pay is determined by how much profit you earn and what your other income is less your personal tax allowance. You can calculate this profit by taking your usual business letting expenses away from your rental income. Business expenses include:

• letting agent's fees
• legal fees for lets of a year or less, or for renewing a lease for less than 50 years
• accountant's fees
• buildings and contents insurance
• interest on property loans
• maintenance and repairs to the property (but not improvements)
• utility bills - like gas, water, electricity
• rent, ground rent, service charges
• Council Tax
• services you pay for, like cleaning or gardening
• other direct costs of letting the property - like phone calls, stationery, advertising

If you provide additional services - like cleaning or meals - then the income for the service and/or let, may be treated as trading income. Trading income is taxed separately from rental income.

Read 'Tax on rental income - an overview' to find out more about taxes. You can contact HM Revenue and Customs if you have questions. Alternatively, you can use an accountant.

• Types of tenancies - private renting

• Tax on rental income - an overview (money, tax and benefits section)

• How to contact HM Revenue and Customs

Setting rent, rent arrears and charging a deposit

You should agree with your tenants what the rent amount, payment arrangements and schedule will be, and when it will be reviewed before a tenancy begins. If a tenant fails to pay the rent and falls into arrears, you have reason to end the tenancy. Read 'Ending a tenancy - private renting' to learn about the process of ending a tenancy.

You can also ask a tenant to pay a deposit and agree the amount with them before a tenancy begins. This deposit acts as security in case of unpaid rent, bills or damage to your property. Read 'Deposits, rent and changing a tenancy agreement - private renting' to find out more.

You must use one of the government’s three tenancy deposit protection schemes to protect your tenants' deposits if they have signed an assured shorthold tenancy agreement. Read 'Deposit protection schemes for private tenants' to find out more about tenancy deposit protection schemes.

• Ending a tenancy - private renting

• Deposits, rent and changing a tenancy agreement - private renting

• Deposit protection schemes for private tenants

Leaving a property empty

If you leave your property empty, you can lose a substantial amount of money in rent loss, Council Tax, insurance, dilapidation and security measures. Your property will also be at risk of vandalism, squatting and complaints from neighbours.

You can contact your local authority's Empty Property Officer for advice on leaving your property vacant. You can also get advice from a:

• solicitor
• Citizens Advice Bureau
• Housing Advice Centre
• Landlords' Association

• Find out about advice for private tenants and landlords from your council Opens new window

• Find a Citizens Advice Bureau or get online advice Opens new window

• Find a solicitor Opens new window

Capital Gains Tax

If you sell your property, you may be charged Capital Gains Tax on any profit you make. You will be exempt from Capital Gains Tax if the property was:

• your only home
• not used for business purposes

You will have to pay Capital Gains Tax if you let out all or part of your home, or have taken in more than one lodger at a time. But you may be entitled to Letting Relief. You should contact your tax office for further details.

• Contact your local tax office - HMRC website Opens new window

The Rent a Room Scheme

If you are a resident landlord - renting out part of your home - you can take advantage of the Rent a Room scheme.

The Rent a Room scheme is optional and allows you to earn a tax-free amount of £4,250 per year from letting out furnished rooms or an entire floor of your property. You cannot use the scheme for homes converted into separate flats.

The £4,250 allowance is an overall limit per landlord and may be halved if someone else in the property - like your partner - also receives income from letting.

You can run a bed and breakfast or a guest house and use the Rent a Room scheme. You will need to complete the relevant parts of the self-employment pages of your Self Assessment Tax Return.

Terms and benefits of the Rent a Room scheme

You can opt into the Rent a Room scheme at any time. If you do not normally receive a tax return and the yearly amount you receive in rent plus any income from additional services you provide are below £4,250, the tax exemption from the Rent a Room scheme is automatic. If your receipts are more than £4,250, you should complete a tax return and claim the allowance from the Rent a Room scheme.

If you do not want to join or prefer to leave the scheme, you will pay Income Tax on your rental income after expenses. To opt out of the scheme at any time, you should complete a tax return within the usual deadline and declare the relevant lettings income and expenses on the property pages of the return.

You can decide whether you will be better off joining the scheme or not by comparing:

• your rental income after expenses
• the amount of rent plus any income from additional services over £4,250

• The Rent a Room scheme

Council Tax and utility bills for landlords

If you become a landlord after having lived alone, you will lose the Council Tax single person discount unless your tenants are exempt from paying Council Tax, like students.

If your property is separated into self-contained flats, the local council will normally bill the tenant directly for Council Tax.

If you rent rooms at your address, you will normally be responsible for paying the Council Tax but can add an amount to the rent to cover the cost.

You should contact your local authority to find out more about responsibilities for paying Council Tax.

• Council Tax

• Visit the Council Tax pages of your council website Opens new window

Utility bills

If you receive the utility bills for a property, you should pay them but can include a charge for water, gas and electricity in the rent.

If the property is separated into self-contained flats, tenants will usually receive separate utility bills and be responsible for paying them.

Resale of gas and electricity

You can install a pre-paid meter or record how much tenants use then pass the charge on to a tenant for their energy use.

You can only charge the amount you have paid for gas and electricity plus VAT. This is known as the Maximum Resale Price (MRP). You can divide any standing charges between tenants according to their usage.

If you charge more than the MRP you may face civil proceedings to recover the amount overcharged and may be required to pay interest on this amount.

• Rules on the resale of gas and electricity - Ofgem Opens new window

Housing Benefit

You can accept Housing Benefit as payment for rent. Normally, Housing Benefit will be paid directly to a tenant, who will then pay you.

You may receive Housing Benefit directly from the local authority if a tenant:

• has difficulty managing their finances
• is at least eight weeks behind in paying rent
• has a history of failing to pay rent

You should contact the local authority immediately if a tenant fails to pay rent or if you are worried about their ability to manage their finances.

• Housing benefit (money, tax and benefits section)

• Housing benefit advice - Citizens Advice Bureau Opens new window

Where you can get advice on letting

If you have questions or need advice on letting issues, contact the Housing Advice Centre or Housing Department of your local authority.

You can also join a landlords' association which offers advice on issues like tenancy agreements. Your local authority should have information about landlords' associations in your area.

You can get advice on legal issues from a solicitor or from your local Citizens Advice Bureau.

• Find advice from your local authority about the private rented sector Opens new window

• National Landlords Association website Opens new window

• Find your local Citizens Advice Bureau office Opens new window

More useful links

• Recognising good private landlords - accreditation schemes

Useful contacts

• Home and community useful contacts

• A-Z of local councils

• Communities and Local Government Opens new window