A LANDLORDS’ TAX GUIDE
When considering the letting of an existing or recently acquired property it is important to understand the tax implications. This guide sets out the general rules applicable to most landlords in relation to tax. Different rules apply to commercial lettings and furnished holiday accommodation and are not covered in this guide. It is not intended to be a substitute for proper professional advice from your accountant or tax adviser.
Income Tax
The rent that you receive from letting properties is usually treated as unearned income by HM Revenue & Customs and is calculated each tax year from 6 April to 5 April. Income tax will be payable on property income, but the method of payment will depend on whether your property income is more than £2,500. If gross (before expenses) property income for the tax year is £1,000 or less the income does not need to be declared as it is covered by the Property Allowance. Where net (after expenses) property income is between £1,000 and £2,500 you can telephone HMRC and they will collect the tax owed by adjusting your PAYE tax code. This means you pay the income tax owed via your salary or pension. If net property income is above £2,500 you will need to register for, then submit a self-assessment tax return each year. In calculating your profit you are entitled to claim certain expenses against the income received. The rate of tax will be determined by the other income you receive in the year.
Allowable expenses
HM Revenue & Customs have rules regarding what expenses are allowable for tax purposes. They also expect you to keep records, including receipts, to support the figures entered onto your tax return and retain them for six years. This will help if HMRC were to open an enquiry into your tax return. Expenses must have been incurred solely in connection with the letting of property. If a cost only partly relates to this you will only be able to claim a part of it.
The most common allowable expenses are:
The common expenses that are not allowable are: • • • • • • • • • • • • Letting agents fees Mortgage interest (but see below) Repairs and maintenance (but not costs of improvements) Replacing domestic items such as: moveable furniture, furnishings, household appliances and kitchenware Insurance premiums for buildings and contents Council Tax and utility bills (gas, electricity and water) – although not if paid by the tenant Rent, ground rent and service charges Cleaning and gardening Accountants fees for preparing letting accounts Costs of travelling to the property during and after a tenancy (the current approved rate is 45p per mile) Stationery costs (such as rent books, stamps etc) Other specific costs such as telephone calls and advertising
• • • • •
Any costs associated with the buying and selling of the property (stamp duty, legal fees etc.) Improvements to the property (extensions or increasing the size of the kitchen or bathroom) The “value” of your own time (for example carrying out you own repairs) Life assurance payments Capital element of any mortgage or loan repayments
A complex area within this is - when is the repair an improvement? As a rule of thumb if the expenditure is simply making good damage arising from the letting of the property or replacement to an equivalent modern standard, it should qualify as a repair and therefore a deduction against income. If, on the other hand, it significantly upgrades and improves the property then it would generally be considered of a capital nature. If a property is bought in a derelict or run down state the cost of putting it into a fit state for letting is likely to be capital rather than revenue in nature. Great care needs to be taken in this area as there have been several tax cases taken to court for a ruling. You should always seek professional advice on any contentious expenditure of this nature.
Mortgage Costs
Finance costs including mortgage interest, product and arrangement fees qualify for a tax credit of 20%. They are not deducted against rental receipts like the other qualifying expenses mentioned above. The tax credit is applied after your overall tax liability has been calculated. The capital element of mortgage repayments do not qualify for any form of tax relief.
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