Key tax facts for current and would-be HMO landlords

There are reported to be about half a million "HMOs" (houses in multiple occupation) in the UK. A rented property is considered an HMO if at least three tenants live in it and they make up more than one household, with shared toilet, bathroom and/or kitchen facilities.

Typically, HMOs provide a home for a wide range of people, ranging from students, unemployed people and those on low incomes to recent graduates, young professionals, non-professionals and people working away from home during the week. HMOs offer accommodation that is normally cheaper than other private rental options, which is a key reason for their continued popularity.

If you're interested in becoming an HMO landlord, this guide provides key facts about how your income would be taxed. Maybe you're already an HMO landlord and want to make sure that you're paying the right amount of tax?

Before we move on to tax, let's briefly look at your key legal responsibilities as an HMO landlord.

HMO landlord legal responsibilities

If five or more people live in an HMO, it's known as a "large HMO" and must have a licence from the local council (see the GOV.UK website).

• Some local councils require smaller HMOs to be licensed, so you should check with your local council.
• The council must carry out a risk assessment on your HMO within five years of receiving your licence application. If any unacceptable risks are evident, you must sort them out.
• Tenants can contact the local council to report hazards in your HMO and the council can take action against you to ensure that you sort out any problems.
• You must inform the council if you or your tenant(s) plan to make changes to an HMO.
• You must also tell the council if your tenants' circumstances change (eg they have a baby or adopt a child).

Need to know! There are different rules for HMOs in Scotland and HMOs in Northern Ireland.

Is HMO rental income taxable?

Rent from your HMO tenants is taxable income once it goes over certain thresholds. Before you're taxed, you can deduct expenses you pay in order to rent out your HMO (explained in more detail below), with any tax allowances also taken into consideration. You pay tax on the profit you make from your HMO, with any other taxable income you receive also taxed as appropriate.

If you rent out more than one HMO or other rental property, the taxable profits from all properties are added together, as well as all costs and allowable expenses, before HMRC (the UK tax authority) tells you how much tax you owe. If applicable, any income you earn from overseas properties must be reported separately to HMRC.

Register as an HMO landlord for self assessment

You don't pay any tax on the first £1,000 you earn from your rental income. This is your "property allowance". If you earn £1,000-£2,500 from annual rental property income, you need to contact HMRC to find out how to report it.

If you earn between £2,500 and £9,999 a year from rental income after your "allowable expenses" have been deducted (or £10,000 before they're deducted), you must report your HMO rental income via self assessment.

If you don't already file a self assessment tax return, you must register by 5 October following the tax year in which you earned rental income. The UK tax year runs from 6 April until the following 5 April.

• Register online for Self Assessment. If you've filed online before, just sign into your existing self assessment tax account.

How much tax will you pay on your HMO rental income?

The amount of tax you pay is determined by:

• the tax expenses and allowances you claim
• how much HMO rental income you receive
• how much taxable income you receive from all other taxable sources (eg wages from employment or self-employment, share dividends, etc)

You're taxed based on the income tax band into which you fall once your total taxable income has been calculated. The income tax band tax rates for the 2023/24 tax year are:

BAND	TAXABLE INCOME	TAX RATE
Personal Allowance	Up to £12,570	0%
Basic rate	£12,571 to £50,270	20%
Higher rate	£50,271 to £124,140	40%
Additional rate	More than £124,140	45%

 

No tax is payable until your income goes over the personal allowance threshold (£12,570), but it decreases by £1 for every £2 of net income you receive over £100,000 and if your net income is £125,140 or more – you don't get the personal allowance. Income tax bands and rates are different in Scotland.

You do not pay National Insurance on your rental income unless being a landlord is your main job, you rent out multiple properties and you buy new properties to rent out (in other words, you run a professional property rental business).

If you own the HMO rental property with others, your tax bill will be determined by your share. If it's 50%, you'll be taxed on half of the taxable rental income from the property. If you own a third, you'll be taxed on 33.33% of the taxable rental income, etc.

What HMO tax expenses can you claim?

You can deduct many allowable expenses from your HMO rental income if generated wholly and exclusively from renting out your property. If you use something for personal and rental purposes (eg your mobile phone), you can claim part expenses, providing you reliably work out how much of the total cost resulted from your activity as an HMO landlord.

Landlords who own HMOs often pay water rates, Council Tax, and sometimes gas and electricity for the whole property. These can be claimed as an allowable expense, which reduces your taxable profit and tax bill. If your HMO tenants pay these expenses or pay you for them, obviously, you cannot claim them as an allowable expense.

Allowable expenses for HMO landlords can also include:

• property maintenance and repair costs (eg replacing roof tiles or a door)
• ground rents and service charges (if applicable)
• redecorating between tenancies
• building, contents and public liability insurance
• gardening and cleaning costs
• agent fees/management fees
• legal fees for lets of a year or less (eg for legal advice about pursuing unpaid rent, etc)
• accountancy/bookkeeping fees
• direct costs (eg phone calls, stationery and advertising for new tenants, etc)
• vehicle/fuel costs (only the proportion used for your rental business)
• costs for disposing of old items of furniture or electrical appliances, etc

Need to know! You can't claim mortgage capital repayments as an allowable expense. Before 2017 you could deduct mortgage interest and other finance costs (eg mortgage arrangement fees) from your HMO rental income to reduce your income tax liability, but now you receive a 20% tax credit.

Replacing furnishings and equipment in HMOs

If you rent out a furnished or part-furnished HMO, replacing furnishings or equipment cannot be claimed as an allowable expense. But, you can claim Replacement Domestic Items relief for replacing a sofa, bed, carpets, curtains, white goods, crockery, cutlery, etc. The quality of the items you are replacing should be similar, because you can only claim the value of like-for-like replacements.

Need to know! Building an extension, converting a loft and making other structural improvements cannot be claimed as an allowable expense, because you're increasing the property's value (ie making a "capital improvement"). However, if you later sell the property, you may be able to claim capital expenses against Capital Gains Tax.

How to report your HMO rental income

You report your HMO rental income by filling out and filing a SA105 tax form, summarising your total HMO rental income and any allowable expenses you want to claim. You must also complete and file the main self assessment tax return, the SA100. That will give HMRC all the information it needs to calculate your tax bill.

The self assessment tax return online filing deadline is midnight on 31 January each year. A £100 fine is payable immediately if you miss it. If HMRC asks you to file a self assessment tax return, you must give details of your rental income and expenses for the tax year – even if you believe there is no tax to pay.

The deadlines for paying your tax bill are:

• 31 January for any tax you owe for the previous tax year (known as a "balancing payment") and your first "payment on account" (ie advance payments towards your tax bill)
• 31 July for your second payment on account to pay the balance for any tax you owe

To enable you to budget for your tax bill, you can make weekly or monthly payments towards your tax bill.

Find out more

• Visit the GOV.UK website for official guidance on your responsibilities as an HMO landlord and your tax liability as an HMO landlord.

Copyright 2023. Sponsored post by Mike Parkes of GoSimpleTax - tax return software that can help you manage your self assessment.