Accounting Guide for Landlords

When it comes to finance and property management matters, becoming a landlord comes with challenges and opportunities. From managing multiple properties and tenants to keeping up with the latest tax regulations, it can be daunting to understand all the financial responsibilities that come with it.

This article aims to show you how cloud accounting, can be a game-changer in this sector, ensuring you’re well-equipped to deal with the complexities of property management with confidence and ease.

Ensure you have the relevant licences

Ensuring full compliance with local and national regulations is crucial for landlords to operate legally within the rental market. A critical aspect of this compliance involves obtaining the necessary licenses, particularly when managing Houses in Multiple Occupation (HMO). An HMO license is a legal requirement that ensures the property meets specific safety and management standards, providing a safe and habitable environment for tenants. This license also protects landlords by ensuring their rental operations align with legal standards, potentially saving them from fines, legal complications, and damage to their reputation.

Generally, the need for an HMO license applies under the following conditions:

• The property is occupied by five or more people forming more than one household (they are not all members of the same family or household).
• Tenants share basic amenities such as bathrooms, toilets, or kitchens.
• The property is at least three stories high, although this condition can vary depending on specific local authority guidelines.

Landlords must determine whether their property meets the criteria for an HMO and, if so, apply for the license through their local council. This involves an inspection of the property to ensure it meets the required safety standards. Failure to comply can lead to significant penalties, including fines and being barred from renting the property.

Get landlord insurance

While not mandatory by law, opting for landlord insurance provides a safety net against potential financial losses, originated by unforeseen circumstances such as property damage, legal liabilities, and loss of rental income. This kind of coverage ensures that landlords are not left out-of-pocket in the event of damages caused by natural disasters, accidents, or even tenants.

If you have a mortgage on your property, your lender may require insurance to protect their investment. While not always legally mandatory for landlords, it becomes necessary for mortgaged properties to ensure compliance, financial stability, and peace of mind.

Maintain good financial records

Good financial records are important for landlords, as a legal obligation and a strategic tool for managing rental properties. By law, landlords are required to preserve financial records for a minimum of five years following the tax return deadline for each year. This ensures that landlords can substantiate their income and expenses, should they be called upon by tax authorities.

Maintaining detailed financial records benefits landlords by streamlining tax preparation, reducing errors, providing a clear financial snapshot, identifying trends, assessing profitability, and making informed investment decisions in the real estate market.

What finances should be tracked as a landlord?

As a landlord, tracking your finances is crucial for both short-term success and long-term growth. It’s not just about tracking what comes in and goes out; it’s about understanding the various types of finances that play a pivotal role in property management.

These expenses can be:

Business expenses

There are many business expenses associated with property rental that can potentially be tax-deductible, thereby reducing your overall tax burden. These deductions can have a major impact on your profitability, making it essential to keep accurate records of all expenses. It’s also worth noting that tax laws and regulations are subject to change, which can affect what you’re able to deduct year over year.

Some common deductible expenses include:

• Insurance fees
• Maintenance and repair costs
• Utility fees (if not paid by the tenant)
• Council tax
• Letting agents’ fees

Given the complexities of tax laws, it’s highly advisable to hire a professional accountancy partner like us who specialises in property management. We can assist you in determining which expenses are tax-deductible according to the latest laws. We can also help you keep track of deductions and ensure that you are maximising your potential savings.

For a more comprehensive list on what can be claimed, you can view our guide to business expenses.

Rental income and outgoings

Understanding the flow of rental income versus upkeep expenses is crucial for any landlord. This ensures that you are operating profitably, but also keeps you compliant with legal obligations. All rental income must be reported to HMRC.

Maintaining a clear overview of your financial status, helps you make informed decisions about future investments, maintenance, and pricing strategies.

To adhere to legal requirements, there’s a specific set of financial records landlords should track. Here’s a list:

1. Rental Income: All payments received from tenants, including deposits, late fees, and regular rent payments.
2. Maintenance Costs: Expenses related to the repair and upkeep of the property, including both emergency repairs and regular maintenance.
3. Legal Fees: Costs incurred from legal services, such as eviction proceedings, lease negotiations, and consultations.
4. Letting Agent Fees: If you employ a letting agent to manage your property, their fees should be recorded.
5. Regular Outgoings and Costs: This includes utilities (if not paid by the tenant), council tax, service charges, and insurance premiums.

Paying taxes on rental income

How much tax do I pay as a landlord?

The tax you pay on rental income is not a one-size-fits-all figure; it depends on the total amount you earn annually from all sources, including your job, rental income, and any other earnings. Your total income determines the tax bracket you fall into, which dictates the rate at which your rental income is taxed.

Expenses related to property maintenance and management can reduce taxable rental income, leading to different tax amounts for individuals with the same rental earnings based on overall income and eligible deductions.

Regarding the categories of tax on rental income, they are divided into three brackets. First, if your total income (including your rental income) is below the personal allowance threshold, you may not have to pay any tax on your rental earnings.

The second category is for individuals whose total income places them within the basic tax rate of 20%. Many landlords fall into this bracket, paying a fifth of their rental income in taxes after deductions.

Lastly, there’s the higher income bracket, where individuals earning a substantial total income are taxed at 40% or even 45% on their rental earnings. This bracket affects higher overall earnings, making a significant portion of their rental income subject to these elevated tax rates.

How to calculate the amount of tax I’ll pay as a landlord?

Paying taxes on rental income is important for individuals who own rental properties. The key to understanding how taxation on rental income works is understanding net rental income. This is the income generated from your rental properties minus allowable expenses.

For instance, if you generate £20,000 in rental income over the year and have incurred £5,000 in allowable expenses, such as maintenance, property management fees, and insurance, your taxable income would be £15,000. The tax you owe on your rental income will then depend on your tax bracket. If you’re in the 20% tax bracket, you would owe £3,000 in tax on your net rental income (£15,000).

Filing tax returns on time is crucial to avoid fines and penalties for late submissions. The UK tax year runs from 6th April to 5th April the following year, and the deadline for online tax returns is usually 31st January of the next year.

What if I have other incomes?

If you have other incomes, all income, including wages, dividends, interest, and profits from rental properties, must be reported on the same tax return.

If the sum of all your income streams pushes your total income into a higher tax bracket, such as over the 40% mark, the profitability of your rental business could see a significant decrease. The higher tax rate applies not just to your rental income but to all your taxable income.

Checklist for Landlords

1. Ensure Compliance with Licenses
2. Obtain Landlord Insurance
3. Maintain Good Financial Records
4. Track Finances Accurately
5. Paying Taxes on Rental Income
6. Calculate Tax Owed
7. Manage Other Incomes

Additional Reminders:

• Regularly review tax laws and regulations for any changes
• Hire a professional accountant
• Stay informed about local authority guidelines regarding HMO licenses

Our tips for Landlords

Managing finances as a landlord in the UK requires a strategic approach to ensure profitability while maintaining a good relationship with your tenants and staying compliant with legal requirements.

Here are some tips:

1. Set Money Aside for Maintenance and Repairs: Allocate at least 10% of rental income for maintenance to cover unforeseen costs without financial strain.
2. Take Advantage of Tax Deductibles: These include repairs, property insurance, professional services, and mortgage interest.
3. Hire an Accountant: This can save you money and time in the long run. A skilled accountant ensures accurate tax deductions and financial organisation to avoid penalties.
4. Hire a Property Management Company: If you own multiple properties, they can handle day-to-day operations, tenant communications, and maintenance tasks, freeing up your time and ensuring your properties are well-maintained.
5. Stay Informed About Your Property’s Value: Keep an eye on the market value of your properties. If the value decreases, you might be eligible for tax savings. If it increases, you can make decisions about rental pricing or selling.
6. Regularly Review Your Rental Prices: Regularly adjust rental prices to stay competitive and reflect your property’s value and quality of accommodation.
7. Create a Financial Buffer: It is advisable to have a financial buffer equivalent to 2-3 months of rent to cover expenses during periods of property vacancy, in addition to savings for repairs.
8. Understand and Comply with Legal Requirements: These include safety standards, licensing, and tenant rights to avoid fines and legal issues.
9. Consider Landlord Insurance: This will cover property damage, liability claims, and loss of rental income, providing valuable protection and peace of mind for landlords.
10. Build Good Relationships with Tenants: Keeping tenants happy through regular communication and responsiveness can lead to longer tenancies, less turnover, and improved financial outcomes.

Hire an expert

Hiring an expert to manage accounting for rental properties can take away all the stress and ensure that everything is taken care of properly. It’s important to ensure that you’re hiring the right accountant for your specific needs.

A cloud accountant manages your accounting needs remotely and provides real-time updates on your financial situation. This is especially helpful for small businesses or individuals who may not have the resources for an in-house accountant.

Why choose CloudAccountant.co.uk

Choosing an accountant with knowledge of the industry gives you peace of mind and allows you to spend your time focusing on growing your business. 

Our friendly team have years of experience working with landlords like yourselves. You’ll benefit from our specialist technical expertise and receive support relevant to your sector, such as legislative changes and reporting requirements.

Our award-winning cloud accounting software will give you the tools to cut down on admin time, monitor cashflow, and manage your business from anywhere.

If you’re considering switching accountants, we make the process simple. Our dedicated team will guide you through the process and ensure a seamless transition.

Get in touch!

Need more information on accounting for landlords? If you’d like some free, impartial advice on how we can proactively support your business with accounting services for landlords, you can contact us by emailing info@cloudaccountant.co.uk, calling us on 01625 546232, or simply fill in the enquiry form below.