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What counts as residential lettings?

Properties that you let out for people to live in as their home count as 'residential lettings'. For tax purposes these are treated differently from furnished holiday lettings.

If you rent out part of your own home this can also count as a residential letting. However, you can take advantage of the 'Rent a Room' scheme instead where you may have no tax to pay on the rental income you earn.

The scheme lets you get tax-free income of up to £4,250 from letting rooms in your home.

• Tax on furnished holiday lettings

• The Rent a Room scheme

Working out your taxable profits from residential lettings

Step one

You work out your 'net profit' as follows:

If you have more than one residential letting, you group all the income and all the expense figures together.

Step two

To arrive at your taxable profit deduct any allowances you're entitled to from your net profit:

If you let furnished property, you can deduct either of the following:

You can't deduct both allowances. Also you cannot claim capital allowances for equipment for use in a dwelling house. Most residential accommodation is classed as a dwelling house. However, you may be able to deduct certain 'capital' allowances for the cost of equipment relating more generally to your lettings business. Check the details in the links below.

• Expenses and allowances on income from property

• Helpsheet HS252 Capital allowances and balancing charges Opens new window

Reporting your profits to HM Revenue & Customs

If your profit is less than £2,500

If you're employed or paying tax on a pension through Pay As You Earn (PAYE), your tax code can be adjusted to collect the tax on your property income each year.

However, your taxable income from property must be less than £2,500. Ask HM Revenue & Customs (HMRC) to send you form P810 to report your income each year.

• Contact HMRC - Income Tax enquiries for individuals, pensioners and employees Opens new window

If your profit is £2,500 or more or you're not on PAYE

In this case you'll need to fill in a Self Assessment tax return. If you don't receive one automatically, follow the link below to find out how to get one.

If your total income from UK property for the 2011-12 tax year is £70,000 or more you must declare it on your tax return. You must also show your expenses separately. If it's below £70,000 you can group the expenses as a single total on your tax return.

When you fill in your tax return, put in the rents and expenses for the year they relate to. It doesn't matter when you actually receive and pay them.

• Do you need to complete a tax return?

• Registering for Self Assessment to get a tax return

• Get Self Assessment UK property pages and help notes Opens new window

How much tax will you pay?

Your taxable profit from property letting is added to your overall income. If this is more than your tax allowances you'll pay tax on it at normal Income Tax rates.

If you let property jointly

If you let property with someone else, when you fill in your tax returns, or forms P810, you should each show your share of:

The help notes for your tax return explain how to do this.

Paperwork that you need to keep

You'll have to keep records of your property letting business for six years after the tax year they're for. You need them to back up the figures you put on your tax return. Your records should include details of:

• Record keeping for landlords

More useful links

• Tax on selling property

• Completing your tax return (individuals and directors)

• Private renting (home and community section)

• Buy-to-let-mortages - The Money Advice Service Opens new window

Useful contacts

• Money, tax and benefits contacts