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Non-resident landlords | Basis of UK taxation of income from property

Basis of UK taxation of income from property

All the basics of taxing property income.

Basis of taxation for Non-resident landlords

Tax returns for the UK property landlord. Making UK tax easy for property owners. Whether you are a UK landlord or a non-resident landlord, Landlords Tax Services provide a complete property tax service which ensures your UK tax affairs are dealt with on time and worry-free. We do it all online and for a fixed fee. No surprises. No stress. Landlords Tax Services offer the easy, professional way to deal with the UK tax obligations of landlords. UK property tax laws are ever-changing and, with more and more people becoming investors and landlords of properties in the UK, Landlords Tax Services have created an easy to use service aimed at providing new or experienced landlords with an efficient system to fulfil their UK property tax needs. Tax Returns for landlords of UK property: the complete tax service for residential property landlords. Our UK based landlord tax accountants can help you comply with UK property tax laws wherever you are in the world. We provide an online, fixed fee property tax service that ensures that the UK tax liability of landlords is kept to a minimum. Our mission is to deal with all our clients’ tax affairs on time and with no stress.

Owners of UK rental property who live outside the UK are obliged to register for UK taxes whether any tax is due or not. The UK has Tax Treaties with over 130 other countries. These treaties generally include sections designed to prevent the same income being taxed twice. Usually the UK will tax UK rental income first and the other country will allow you to deduct the UK tax from the local tax up to an amount equal to the local tax. Tax returns for the UK property landlord. British and EEA citizens living anywhere in the world, along with many other people living in the country of which they are citizens, are entitled to the UK “Personal Allowance”, a £NIL band rate that means the first £12,570 of profit from rental may be free of tax in the UK, and profits between £12,570 and £50,270 are taxed at 20%. Higher rates apply to UK income in excess of £50,270 (2022-23 rates).

Basis of taxation for Non-resident landlords

This summary relates to a residential letting activity, 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.

When receiving rental income, what gets taxed?

The profit made on property income is taxable. The profit is calculated as rents less allowable expenses. The default basis for calculating rental income is the cash basis where the income taxable is cash received less cash paid. The earnings or accruals basis remains an available option.

Finance costs including loan and mortgage interest are not allowable in calculating profits of an individual’s lettings business but they may be used to reduce the tax liability at 20% subject to some restrictions. See Finance cost relief.

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, and no ni falls to be paid on it.

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Basis of taxation for Non-resident landlords

Landlords Tax Services - Basis of taxation for Non-resident landlords

Basis of taxation for Non-resident landlords

What does the law say?

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. However the HMRC Manual at BIM 37600 instructs inspectors to adopt a realistic interpretation that is generally helpful.

How are the letting business accounts prepared?

Accounts are therefore prepared on the cash basis where gross rents are up to £150K and accruals (earnings) basis where gross rents are more than £150K, and for businesses excluding any items of expenditure where there is a duality of purpose.

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.‍

Basis of taxation for Non-resident landlords

How is the profit split?

Where a property is jointly owned, the default position is that the profit is divided equally between the joint owners. Where the joint owners are husband and wife, the profit MUST be split equally unless it can be shown that actual ownership is in a different proportion. Other joint owners have some freedom in how profits are split. If a property is owned by two or more people as tenants in common, the split of profits normally follows the proportions in which the property is owned.‍

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.

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