Basis of taxation of income from property
All the basics of taxing property income.
Basis of taxation for UK 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 £0% rate band 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 (2024-25 rates).
Basis of taxation for UK resident landlords
When receiving rental income, what gets taxed?
The profit made in the property rental business 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 National Insurance falls to be paid on it.
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Basis of taxation for UK resident landlords
Basis of taxation for UK 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 normal (accrual) basis for businesses and cash basis for individuals, excluding any items of expenditure where there is a duality of purpose. All replacements of furniture and equipment on a like-for-like basis is an allowable expense though there remains no relief for the initial expenditure.
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. However where the building was in such a poor condition that a discount was given on purchase the work done may qualify as a capital expense and not one that could be set against rents. Get in touch today to find out how we can help you with your lettings business accounts.
Basis of taxation for UK resident landlords
Things to watch out for
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 letting 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. Get in touch today to make sure you don’t miss out on the reliefs available to landlords.
Basis of taxation for UK 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.
Basis of taxation for UK resident landlords
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.
