This overview 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.
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. From 5th April 2016 the replacement of furniture and equipment on a like for like basis is fully allowable and there is no longer a Wear and Tear Allowance. 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 taxpayers highest rates, losses generally may not be set off income from other sources other than some types of other property income. Losses may be carried forward to offset future profits, with some restrictions on the type of profits they may offset.
Who needs to file a Tax Return?
All UK residents with: un-taxed income, or profits, or income, or profits not taxed at the correct rate, are obliged to notify HMRC by 5th October following the end of the tax year when such income or profit first arose. Landlords must also notify HMRC when gross rental income exceeds £2,500. Unless the taxable amount is under £2,500 and HMRC can collect the tax due through the PAYE scheme, HMRC will require submission of a Tax Return. The landlord’s Tax Return must include the additional property pages. All Income Tax Returns must be filed by 31st January following the end of the Tax Year (the previous 5th April) if filed online, otherwise the deadline is the previous 31st October. The calculation of the tax liability takes into account all the landlord’s other income and allowances, and for this reason is necessarily complicated. Get in touch to find out how we can help you with your Tax Return.
What happens when a property is sold?
On disposal of the property by a UK resident any increase in value is potentially subject to Capital Gains Tax. The gain is calculated by comparing the sales proceeds with all the acquisition costs. Some reliefs are available and there is a personal annual exempt amount. Substantial reliefs are available if the landlord has lived in the property at any time as his only and principal private residence. Get in touch today find out how we can help you with your Capital Gains Tax calculation.
What makes an individual UK resident?
You are probably resident in the UK if you normally live in the UK and only go abroad for holidays and short business trips. You are always resident if you spend 183 or more days in the UK in the current year If you believe you may be non-resident then you must pass several precise tests - please contact us.