Landlords Tax Services Ltd - The complete tax service for the residential property landlord

Technical notes

BASIS OF TAXATION OF PROPERTY INCOME

• Like any other business
• Single business for all properties
• Tips – often forgotten expenses to claim

The profit made on property income is taxable. The profit is calculated as rents less allowable expenses. The rent and allowable expenses are calculated on an “arising” or “accruals” basis and not on a received and paid basis. The exception to this rent where this is less than £15,000 in the tax year, when the amount received may be used.

All property income is treated as arising from a single “property business”. With the exception of furnished holiday lettings, the income is treated as unearned income-i.e. it does not count as income for the purposes of calculating pension contributions, conversely no National Insurance falls to be paid on it.

THE LAW

The taxation treatment of income from property is governed largely by ITTOIA 2005 s272. The main rule regarding allowable expenses is that they must be wholly and exclusively for the purposes of the business. Any element of private use will disqualify a claim for the expense.

ACCOUNTS

Accounts are therefore prepared on the normal basis for businesses excluding any items of expenditure where there is a duality of purpose. There are two choices for the wear and tear on the contents of the property. Either the cost of replacing the fixtures and fittings may be claimed (Renewals Basis) or alternatively a Wear and Tear Allowance may be claimed.

Repairs done before a letting commences but done in anticipation of letting the property may be claimed as if the expenditure had occurred on the first day of the letting.

TIPS

Commonly overlooked items for which tax relief is available are the cost of travel, and the cost of telephone calls. If the letting business is substantial there may be some justification in making a claim for the additional cost of working from home in maintaining records etc. If the lettings business is substantial and a vehicle is used a lot in connection with the business it may be possible to claim Capital Allowances on it (restricted to the business proportion of its use). If the property is jointly owned and one party has income taxable at the basic rate and the other is taxable at the higher rate then you should ask the basic rate tax payer to undertake the management of the property and pay him/her accordingly. That income is taxable at the basic rate and reduces the higher rate taxpayers liability.

Losses may not be offset against other income but may be carried forward to be set against future profits.

SPLIT OF PROFIT

If there is a formal partnership business then the normal partnership rules will apply, but this is uncommon. It may arise, for example where a business lets out surplus accommodation.

Where there is no partnership, the share of any profit or loss arising from jointly owned property will normally be the same as the share owned in the property being let. But joint owners can agree a different division of profits and losses and so occasionally the share of the profits or losses will be different from the share in the property. The share for tax purposes must be the same as the share actually agreed.

However, where the joint owners are husband and wife, or civil partners, profits and losses are treated as arising to them in equal shares unless:

• both entitlement to the income and the property are in unequal shares, and
  
• both spouses, or civil partners, ask their respective tax offices for their share of profits and losses to match the share each holds in the property.

If a taxpayer’s only income from land and property in the UK comes from a jointly owned property, that share alone will form the rental business. If a taxpayer has other income from land and property in the UK, whether in their name alone or owned jointly with other people, their share from the jointly owned property will form a part of their rental business along with the other income and expenses on any other properties which they own alone. Once again, however, shares held in a different capacity (partner, trustee, executor) must be kept separate.

The full article may be found at http://www.hmrc.gov.uk/manuals/pimmanual/PIM1030.htm

DISCLAIMER
© Landlords Tax Services Ltd 2008 All Rights Reserved - In an article such as the one on this page we can only give brief general guidance and cannot cover all situations. This guidance may not cover all your personal circumstances and so you should not rely on it. Before taking action or not, always do your own specific research and seek appropriate professional advice which takes into account your personal circumstances, with the full facts of the case and all documents to hand. Neither Maurice Patry F.C.A. nor Landlords Tax Services Ltd can be held responsible for the consequences of any action or the consequences of deciding not to act.