Tax Guide for Landlords
Originally written in 2000, the following is a brief guide to tax on lettings, what records you need to keep, and how to make a simple annual return of your net letting income to HMRC. It does not however attempt to cover the wider aspects of personal taxation. If you are unsure about any aspect of your tax liability, you are advised to seek advice from your accountant or other financial advisor.
Will I have to pay tax on my letting income?
Not necessarily – it all depends on your personal financial circumstances. For example, if the let property is mortgaged, and the mortgage and related costs of the property exceed the rent you receive, then it is possible that no tax will be payable.
Home letting – your tax position
Income tax is payable on rent received from property which is let. Your tax position will determine whether you pay tax or not. All profit you make from letting should be added to your other taxable income for the year, although the financial records for letting must still be kept separate.
You have to pay income tax if the total of your taxable income is greater than your tax allowances.
Rent a Room Scheme. If you let rooms within your own home, you may qualify for a tax exemption. Contact your tax office for more details. (Inland Revenue Booklet number 87)
What expenses can be offset against the rent received?
Only those expenses incurred “wholly and exclusively” for the purpose of the let can be offset against your letting income. These include mortgage interest, general repairs and maintenance, insurance and your agent’s property management fees.
What records do I need to keep?
You need to keep a record of all income and expenditure incurred in relation to all lettings. The records should show to whom payments have been made and from whom income has been received.
Completing your income schedule
The example schedule below demonstrates how you may calculate your tax liability on income from furnished lettings.
The rules provide a separate tax treatment from businesses and are known, as Schedule A. The reason for this is that rental income of this kind is not treated as a trade for income tax. If you make a loss on your rents, you can carry the loss forward to subsequent years and set it against future rental profits.
Only losses from furnished holiday lettings may be set against other income in the year of the loss.
If you have more than one let property, the income and expenses are amalgamated.
The taxable income comprises the rents receivable less associated expenses. All rental income is taxable on an accruals basis i.e. when it falls due not when it is paid. So if at the year-end your tenant owes you two months’ rent the Revenue will still tax a full year of rental income. Bad debts are deductible – you will not in the long run be taxed on rents not received.
All tax due in respect of rents will be paid under the self-assessment system.
You will need to complete the Land and Property supplement of your self-assessment tax return.
Examples of typical allowable expenses:-
Utilities paid by the landlord such as council tax, water, gas, electricity, phone Include here the full amount of water, sewerage and any other rates paid on the property if the tenants do not pay these. In certain circumstances, a landlord may also be liable for council tax and this could then be included.
The cost of providing services
e.g. gardening or cleaning
Include all insurance (buildings, contents and mortgage protection etc.) policies in connection with your property.
Repairs and Maintenance.
This may include any expenses that are for repairs and general maintenance that prevent the property from deteriorating. Costs for improvements to the property cannot be set off against tax.
Management fees relating to the ongoing costs of letting.
Letting agent management fees may be claimed.
Wear and Tear Allowance.
For property let furnished, you may claim an allowance for the wear and tear of furnishings. This is calculated by taking 10% of the rental income for the year, less any services borne by the landlord but usually payable by the tenant such as water bills and council tax, to be claimed as a deduction (if paid by the taxpayer). Alternatively, you can claim for replacement costs (see below) – but in most cases, the 10% allowance is both more beneficial and simpler. This is an alternative to claiming the replacement cost of furniture on furnished lettings. It will nearly always be far preferable to claiming the replacement cost of furnishings because the W&T claim will be much higher than actual expenditure on such items over a period of some years. Note that if you claim the W&T allowance you cannot then claim in addition the cost of replacing items like cookers, washing machines or carpets. But the W&T allowance will usually well exceed the cost of such replacements anyway. It is not statutory, but an Inland Revenue concession.
Where the W&T allowance is claimed, items that need replacing but are actually considered an integral part of the building, (in contrast to the replacement of furnishings etc) such as baths, toilets and windows are allowable because they are treated as repairs to the fabric of the building.
Renewals of furniture
Alternatively if you choose to forego the 10 per cent you may deduct from your rental account the cost of renewing furnishings and fixtures but only the amount of replacing your original assets.
(If you do not claim Wear and Tear or Renewals)
Finance charges including Mortgage Interest
You may generally claim tax relief on interest payments relating to a loan used to purchase or improve a property, where the property is let for 26 weeks or more. The mortgage interest relating to a rental property is allowed in full as a tax expense. It is not restricted to £30,000 in the same way that tax relief was given up to April 2000 for a mortgage on your home.
The security provided is not relevant to the claim for interest. So, as often happens, where a person puts up their own home as security in order to raise a buy-to-let mortgage, the whole of the interest paid is allowable as a deduction from the rent, even though the let property itself is not mortgaged. The critical feature for making the interest allowable is that the purpose of the loan was to purchase the property used for letting. The security provided is not relevant.
Professional fees in drawing up accounts.
Your Accountant’s fees.
Any other expenses incurred wholly and exclusively for the purpose of your rental business
e.g. advertising for tenants, stationery and telephone calls.
Items not allowable
Include legal fees in connection with the purchase of the property such as legal fees, and capital expenditure.
EXAMPLE LETTING INCOME SCHEDULE
Property: 2X High Street, Swindon
|Rental Income for the Year|
|ended 5th April 20…||£ 5,500|
|Water and Other Rates||£ 210||£ 210|
|Rents (net of rates)||£ 5,290|
|Repairs & Maintenance||£ 310||……|
|Motor Expenses||£ 20||……|
|Cleaning Materials||£ 10||……|
|Sundry Expenses (phone, post etc)||£ 20||……|
|Gardener’s Wages||£ 50||……|
|Gas and Electrical safety checks||£ 80||……|
|Other ..(Carpet Cleaning)||£ 80||……|
|Management Fees||£ 500||……|
|Accountancy Fees||£ 150||……|
|Wear & Tear||……|
|(allow 10% of rents net of rates)||£ 529||£ 1,839|
|Net Rents||£ 3,435|
|LESS Interest paid||£ 1,800|
Will tax be deducted from my rents?
If you are living outside the UK and you receive rents from UK property then your tenant or letting agent will deduct tax from the rent received. If you are UK tax resident then you can receive your rents without deduction of tax.
For overseas landlords, the Letting Agent we can arrange with the Inland Revenue to have rents paid without deduction of tax.
What happens if I let a room in my home?
HMRC have devised a special scheme for people who let a room in their home. It is called the Rent a Room Scheme.
Under the Rent a Room scheme you will not be taxed on your first £4,250 (for 2000/01) of gross income (that is income including any sums you may receive for providing services) from letting furnished accommodation in your only or main home.
There are various provisos relating to the Rent a Room scheme and you should seek professional advice to determine whether you qualify.
What happens if I receive rents from a holiday cottage?
Letting a furnished holiday property receives a special tax treatment as the income is treated as trading income.
A letting is normally regarded as a furnished holiday letting if it is UK property that is furnished, and available for holiday letting to the public on a commercial basis for 140 days or more during the year and not occupied continuously for more than 31 days by the same person for at least seven months of the year.
If you make a loss from a furnished holiday letting, you can either carry the loss forward to the next year or you can set it against other income arising in the year of the loss.
Rental income of all foreign properties will be aggregated, however, they remain separate from any UK property income.
We have financed the cost of a cottage, to let as a Furnished Holiday Letting, by taking out an additional mortgage on our home. Is the interest on the loan deductible in computing the profit/loss of the let?
The fact that the mortgage is secured on another property is not an issue. If the purpose of the loan was to buy the property used as a holiday let, the interest is a relevant expense.
Principal Private Residence
I jointly with my then fiancée purchased our only property 6 years ago and never occupied it and was then let out. We currently live with my brother.
As this is our only property does it qualify as our Principal Private Residence and or does it qualify for letting relief?
Do I need to actually occupy the property for it to be eligible for the above and if we qualify for letting relief does it mean we get two lots of allowances.
As the property is let, any capital gain arising will be chargeable to CGT.
However, as you do not own any other property, you should qualify for some relief under S222 TCGA 1992 provided that the house “has at any time in (his) period of ownership been his only or main residence”.
Basically, before you sell the house, there should be a period where you can demonstrate that you actually lived there. Obtain household bills in your name, get post delivered etc. Obviously, it would be desirable if it was not let at this time!
If you meet this criterion, any gains arising in the last 3 years of ownership will be spared from CGT.
Both yourself and your fiancée will have an annual CGT exemption of £7,200 that can be set against any balance of the gain, also indexation and taper relief will make a further reduction.
Two points to watch on your mortgage, if you have one. Firstly, interest relief for home loans ran at 10% to 5/4/00. You would qualify for a higher rate for letting a property. Secondly, have you changed your property insurance? If you let a house that is insured as a private home, your insurance will be invalid.
You should also be eligible for the “letting-exemption”. The gain not covered by the Principal Private Residence (PPR) exemption will also be reduced by the lower of:
the PPR exemption
In the case of a married couple, the above exemption is available to both spouses.
Repairs to property
I own a property that is let and have two queries:
In the 3 years prior to letting (whilst I was in residence), I carried out various repairs (roof repairs, re-pointing, painting etc.) to the property. Are these expenses allowable in calculating my tax liability for rental income on the basis that it was prior to letting?
I let and manage the property myself and do not need to use an external management/letting agent. Is it possible to make a 15% letting management charge?
Your assistance is greatly appreciated.
No. If the expenditure was immediately prior to letting you might argue that it was capital and bring it into your CGT comps on disposal.
No. If you pay yourself a fee for managing your own property, that would be taxable income for you too.
Apportionment of income
My spouse is 30 with no children planned and wishes to give up work. We own 5 properties in joint names (joint tenants). Is it possible to declare 100% of the profits to my spouse?
Section 282B(4) ICTA 1988 The income apportionment must reflect the beneficial interests in the properties.
Expenditure on double glazing
I have a portfolio of some five properties generating rental income.
In the past, expenditure on such items as double glazing and new kitchens etc has been passed through my revenue accounts.
For the last two years I have had Inland Revenue enquiries into the R & R portion of my expenses, which did look vastly out of proportion to the gross rents received.
Because of the above I have been receiving hefty additional accounts bills for dealing with the enquiries – it is these that have prompted me change over to you, although I must point out my predecessors are much more ‘up-market’ than you and may have access to more Revenue precedents.
In this years accounts I spent £6,000 putting in double-glazing to replace decaying single glaze units. I was proposing to apportion this 50% R & R / 50% Capital Improvement.
I would welcome opinions on this I am not a penny pincher and would sooner pay more tax than have my life interrupted by HMIT enquiries!
Whilst expenditure on such items as kitchen refurbishment / new roofs did fall within the remit of ESC B4 on a case by case by basis, expenditure on Double Glazing has now been accepted on a 100% revenue basis.
The argument that the Revenue have agreed is that with the advent of the latest manufacturing technology it is now cheaper to rip out damaged single glaze units and put in double glaze from scratch rather than repair the existing units – thus R & R not Capital Improvement
This precedent has apparently now been tested with several tax offices and approved in each and every case.
Expenditure prior to letting
In the tax year 99/00 a house was purchased for rental purposes that required major renovation. Money was borrowed to buy and renovate it.
The property was however not rented out until the current year 00/01 as it took 8 months to renovate.
Can loan interest relief be claimed in the 99/00 tax year effectively making a loss on renting (schedule A) for 99/00. This would then be brought forward to set against future year profits.
Is there something about a property having to be available for rent during the tax year before you can claim interest relief against etc.?
Under Section 401 ICTA 1988 you can claim a deduction for expenses incurred before the rental business begins provided that:
the expenditure is incurred within 7 seven years of rent commencing and
the expenditure is not otherwise allowable as a deduction for tax purposes and
the expenditure would have been allowed as a deduction if it had been incurred after the start of your rental business.
Subsequent Sale of Property
You may become liable for Capital Gains Tax on the sale of your property.
The cost of the property (including fees incurred in purchasing the property and any capital expenditure incurred, e.g. double glazing, extension etc), are offset against the proceeds received from the sale. Also if the property has been held for more than two years you will receive taper relief which reduces the gain by a set percentage depending on the period of ownership ranging from 5% for 3 years to 40% for ten or more years. The remaining proceeds are then reduced further by an individual’s annual exemption (For 2000/2001 £7,200 or £14,400 for a jointly owned property) with the balance being taxed at your top rate of tax.
If the property was at some point in time your principal residence then it will be exempt from Capital Gains Tax for a period of three years from it when it ceased to be your principal residence. Its sale will also attract Lettings Relief of £40,000.
Your financial advisor can explain this in greater detail.
Receipts Have you kept receipts for all expenses incurred? From 6 April 1996, all taxpayers have been required to keep tax records of all purchases and receipts under the Self-Assessment system. You are required to keep the records for five years.
Lettings Insurance. Insurance schemes are now available to protect against rent arrears and costs of legal disputes with tenants.
Where to go for more Information?
More details are available in the Inland Revenue booklet IR150, available from local tax offices.
Self Assessment: A general guide Inland Revenue leaflet – SA/BK1
A guide to keeping records: Inland Revenue leaflet – SA/BK3
Rooms to Let – Inland Revenue leaflet IR87
The Inland Revenue operate a self-assessment helpline on 0300 200 3310. (updated 2014)
Other information is obtainable from following sources:
‘Which ?’ – Consumers’ Association Tax Saving Guide. Published annually.
Department of Environment Leaflet No. 22. Letting Rooms in Your Home available from the Citizen’s Advice Bureau.
Your Letting Agent
These notes are a brief guide based on our knowledge and understanding of current legislation and tax concessions. You must take individual professional advice before taking any action based on these notes