Letting UK Property and the UK Taxman
Rental income
Rent derived from letting property is taxable. Generally, regardless of the type of lease, all such income is pooled together. Thus, any losses on a particular property may be offset against profits on another.
Furnished holiday lettings have some tax advantages over other lettings. Professional advice can identify if you meet the qualifying tests for these to apply.
Accruals basis
Assessable rental income is computed using principles that apply to a trade or a business. As a result incomings declared are those “earned” in the tax year regardless of when received. Similarly, allowable expenditure is calculated with reference to work done or goods and services supplied, no matter when a bill is actually issued or paid.
In certain circumstances, the Revenue may accept the use of the “cash basis” if rents from all let properties do not exceed £15,000 a year. This means that rental profits are calculated with reference to cash actually received and paid within a given tax year.
Special rules apply to “Premium Leases” and advice should be sought to ensure that the income is declared correctly and available allowances claimed.
Deductible Expenses
Many people appoint a professional agent to manage properties. Their charges are fully deductible in arriving at the taxable profit, as are accountancy costs incurred in connection with the preparation of annual accounts.
You may also deduct expenses in respect of water rates, repairs, maintenance, insurance etc. Furthermore, certain expenses incurred prior to letting your property will be allowable for tax purposes.
For property let fully furnished, you can claim an allowance for the wear and tear of furnishings. This is calculated by taking 10% of the rental income paid for the year, less water rates and council tax (if paid by you). Alternatively, you can claim for replacement costs – but in most cases, the 10% is both more beneficial and more straightforward.
Mortgage interest
There is no restriction on the amount of borrowing on which tax relief will be eligible where that borrowing was applied to the cost of purchasing or improving a property. Any relief is effectively given at your top rate of tax. Furthermore, it is now possible to remortgage a property but in those circumstances the maximum amount of borrowing qualifying tax relief is limited to the original purchase price of the property or the value on the date the letting commences.
Other interest
Interest payable under a hire purchase agreement or on an overdraft is tax deductible when the asset purchased is used “wholly and exclusively” in the business of letting a property.
Self Assessment
Even if you do not receive a Self Assessment Tax Return, the onus is on you to notify HM Revenue and Customs (HMRC) if you have a tax liability on letting income. Failure to meet your obligations under Self Assessment will lead to stringent automatic penalty and interest charges.
These obligations will mean the annual submission of a Self Assessment Tax Return and timely payment of tax. Tax will usually be due on 31st January and 31st July and will incorporate the balance of tax due for the previous tax year and payments on account against the following years liability.
Record keeping
There is a requirement under Self Assessment to keep sufficient records to enable you to accurately compute your letting profits each year. This will include rental statements provided by letting agents, receipts for bills paid and indedd any other expenses incurred in the letting of your property.
Normally, these should be kept for five years after the 31st January following the end of the year of assessment, and failure to produce these in the event of an HMRC enquiry into your affairs may lead to harsh financial penalties being incurred.
Capital Gains Tax
If you sell your property you have let, you will need to consider the implications of Capital gains Tax on any profit – particularly if the property was inherited or purchased as an investment.
Sometimes, any profit can be reduced proportionally on account of exempt periods – for example, when your property has been your principal private residence. In that particular case, whether you were living in the property or not, the last 36 months of ownership will be an exempt period.
Additional exemptions are available in respect of properties that have been both owner occupied and let. These can be very valuable, especially where a property is owned in joint names.
This is one of a set of guides from The Fry Group www.thefrygroup.co.uk
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