What counts as rental income

Income is more than the rent

Your rental income is everything you receive in connection with letting the property, not just the monthly rent figure on the tenancy agreement.

One property business, not several

If you let more than one property in the UK, they form a single UK property business. Income and expenses are pooled, so a loss on one property automatically offsets a profit on another. You do not calculate each flat separately and you do not report them as separate businesses.

UK and overseas property are separate businesses from each other, so a loss on a French apartment does not reduce a profit on a Manchester flat.

Cash basis is the default

Most individual landlords use the cash basis, where rent counts when it is received and expenses count when they are paid. That matches the bank account and keeps the arithmetic simple.

Rent received in the year                    £14,400
Other receipts                                  £300
                                            ---------
Total rental income                          £14,700
Less allowable expenses                      -£3,900
                                            ---------
RENTAL PROFIT                                £10,800

Note: mortgage interest is NOT among those expenses.
That is module 2, and it is the biggest thing landlords get wrong.

The £1,000 property allowance

Like the trading allowance, there is a £1,000 property allowance which you can deduct instead of your actual expenses. If your property income is under £1,000 you generally have nothing to report at all.

These are two separate allowances. Someone with a side business and a rental can have both, one against each income type. What they cannot do is use either one twice, or stack an allowance on top of real expenses.

The bit HMRC does not spell out

Rental profit is not rent minus mortgage payment. A great many landlords calculate it that way, and it produces a number that is wrong twice over: the capital repayment part of a mortgage payment is never deductible, and the interest part is not deducted as an expense either. It gets different treatment entirely, covered in the next module.

The practical consequence is that a landlord who is barely breaking even in cash terms can still have a taxable rental profit. That is not an error, and it is the single most common shock in landlord taxation.

Common mistakes

• Reporting only the rent. Other receipts connected to the letting count too.
• Treating each property separately. UK properties pool into one business.
• Deducting the whole mortgage payment. Capital repayment is never allowable.
• Confusing the property and trading allowances. Separate allowances for separate income types.