This summary relates to a residential letting business which is applicable to most individual landlords. Special rules apply to the RENT A ROOM scheme and to HOLIDAY LETS. Hotels and Guest Houses are also excluded from these general rules.
Special rules apply to non-resident landlords (see tax deduction below). A person is subject to UK income tax in any year in which he or she has any income arising in the UK which is untaxed or not taxed at the right rate (with special rules in the years of emigration and immigration).
With effect from April 2015 all disposals of UK residential property by non-residents attract Capital Gains Tax (CGT). Similarly with effect from April 2019 all disposals of UK non-residential property by non-residents attract Capital Gains Tax (CGT).
RENTS & ALLOWABLE EXPENSES
Rents less allowable expenses are taxable as part of the taxpayer’s total UK income. The main rule for allowable expenses is that they must be wholly and exclusively incurred in the course of the letting business though some relaxation of this rule may be available in specific circumstances. It is important to differentiate initial and capital costs from running costs. Capital costs and set-up costs, which are capitalised, are usually relieved for tax purposes against the calculation of the gain on sale of the investment property. The cost of improvements is normally treated as increasing the base cost of the investment.
One of the biggest expenses will often be the mortgage or loan interest. From 5th April 2019 only 25% of the interest (and none of the capital) is allowed as a deduction in calculating taxable profit. Then the final tax bill is reduced by 20% of the other 75% of the interest, subject to some limits. From 5th April 2020 none of the interest is allowable in calculating profit but 20% of the whole of the interest is deducted from the tax due subject to the same limits.
The lettings agent will incur other costs and as long as these represent routine maintenance these too will normally be allowable. No allowance is given for the cost of initial furnishings or equipment. Get in touch today to find out how we can help you with your letting business accounts.
HOW IS “RENT” DETERMINED?
From 5th April 2017 the rental income is normally calculated as the cash received less payments made for allowable expenses.
HOW ARE “LOSSES” TREATED?
Special rules apply to the treatment of losses. While profits are added to a taxpayer’s income and taxed at the taxpayer's highest rates, losses generally may not be set-off against income from other sources, except for losses created in a property business by Capital Allowances. Capital Allowances are not available in respect of residential property. Losses may be carried forward to offset future profits of the same property business.
WHY IS MY AGENT DEDUCTING TAX FROM MY RENT?
Unless told otherwise by HMRC, managing agents must deduct basic rate tax from the rents collected and pay this to the H.M. Revenue & Customs (HMRC) each quarter. Where there is no managing agent the obligation to deduct and pay to HMRC the basic rate tax falls on the tenant, unless the rent falls below a de minimis figure. The agent will not be aware of all your deductible expenses and therefore the tax deducted will be more than the amount due in many cases.
CAN I RECEIVE MY RENT WITHOUT THE AGENT DEDUCTING TAX?
Landlords can apply (on form NRL1) for a formal H.M. Revenue & Customs (HMRC) approval to receive rent gross, and on receiving this, the managing agent then need not deduct tax. This permission will be withdrawn if the landlord fails to keep his/her tax affairs up to date. This is only an exemption from having the agents deduct tax, it does not exempt the landlord from tax on rental income. Get in touch today and let us help you apply for a non-resident approval to receive rent gross.
WHO NEEDS TO FILE A TAX RETURN?
The non-resident landlord must make an Income Tax Return whether any tax is due or not, unless unless he/she has been told in writing by the H.M. Revenue & Customs (HMRC) that a return is not required. The Tax Return is made up to 5th April each year and must be submitted by 31st January following the end of the Tax Year when filed on line. Non-residents cannot now use the HMRC on-line tax return filing software. Get in touch to find out how we can help you with your Tax Return.
What are PERSONAL ALLOWANCES?
The Personal Allowance is an amount that may be received free of tax (see rates & tables). Citizens of the EEA (EU + Iceland, Liechtenstein & Norway) are entitled to the Personal Allowance wherever they are resident. Citizens of the Commonwealth and countries with which the UK has an appropriate Double Taxation Agreement are entitled to the annual Personal Allowance if they are resident in their own country.
WHAT HAPPENS WHEN A PROPERTY IS SOLD?
Until April 2015 the gains made on disposals made by people who are non-resident for five tax years or more are generally outside the scope of UK tax. Gains accruing after 5th April 2015 on disposals of residential property occurring after 5th April 2015 and made by non residents are subject to UK Capital Gains Tax. Gains accruing after 5th April 2019 on disposals of non-residential property occurring after 5th April 2019 and made by non-residents are subject to UK Capital Gains Tax. Get in touch today find out how we can help you with your Capital Gains Tax calculation.
CAPITAL GAINS TAX RETURNS
If you are disposing of a UK residential property you MUST report the transaction and pay any tax due within 30 days of transfer (completion). In addition such disposal must be reported with the annual Self-Assessment tax return.