I rent out a number of properties. Do I have to file a tax return?
Yes. If you are in receipt of property income of:
- £2,500 or more after deducting allowable expenses; or
- £10,000 or more before deducting allowable expenses
In other cases, HMRC should make an adjustment to your PAYE code to collect any tax due on such income. For more information about self-assessment or PAYE codings, please see the relevant other FAQ sections.
What is a ‘property business’?
A UK property business is a business which a person (a body of persons) carries on for generating income from land or property in the UK. For example, property income from a UK property business includes rents from UK properties, such as houses, flats, shops and garages
If a taxpayer owns some land or property which is let to a clay pigeon shooting club for example, or owns part of a river and sells fishing permits to anglers, such income is also taxed as property income.
If you are a UK resident taxpayer and let out an overseas property, such as a villa in Spain, any profits are also charged to UK income tax as income from an overseas property business and this is kept separately from the UK property business.
What if I am a UK non-resident landlord?
Income received by a UK non-resident landlord from non-UK land and properties would not be subject to income tax in the UK.
However, income derived from a UK land or property would be chargeable to UK income tax in all circumstances, irrespective of the residency status of the beneficiary of the rental profits.
How are property business profits calculated?
Profits from UK land or property are treated, for tax purposes, as arising from a business, i.e. the property business profits are computed using the same principles as for trades but the taxpayer is not actually treated as if they are trading and in particular the accounts should be on the ‘accruals’ basis except for some small businesses. In practice, this means rents receivable less expenses payable.
What are allowable expenses?
Expenses are deductible from rents only if those expenses are incurred ‘wholly and exclusively’ for the business of letting. Examples of deductible expenses will include:
- Advertising expenses;
- Genuine property repairs;
- Rates and council tax;
- Service charges;
- Ground rents;
- Mortgage interest on a loan taken out to purchase the property and other finance charges;
- Property insurance; etc.
What about capital expenditure?
In arriving at the profit or loss of a rental business for tax purposes you cannot make deductions for capital expenditure – i.e. expenditure on items that enhance the value of the property. This means the following items are not deductible expenses:
- The cost of buying, altering, building, installing or improving fixed assets used in the rental business
- The depreciation of any capital asset (land, leases and other interests in land, buildings, plant, machinery, etc.) or
- Any loss that arises on the sale of any capital asset.
But you can claim special tax allowances to take account of the depreciation of some capital assets (but not land) used for rental business purposes. The main types of allowances are:
- Capital allowances
- Wear and tear allowance
Capital allowances are available on expenditure on the assets in a residential accommodation. This covers items like vehicles, tools, ladders, computers, business furniture, furnishing and fittings, lifts, central heating and air-conditioning which belong to the taxpayer and are employed/let in the rental business. The allowances is a 25% reducing balance writing-down allowance.
The wear and tear allowance is 10% of the net rents received. Net rents is gross rents less any expenses that would normally be borne by the tenant, e.g. council tax and water rates.
The 10% wear and tear allowance covers assets like:
- Movable furniture or furnishings, such as beds or suites;
- Fridges and freezers;
- Carpets and floor-coverings;
- Crockery or cutlery;
- Beds and other furniture, etc.
What if I make a ‘loss’ on my property business?
Where expenses exceed income, a property business loss will arise. If you have several sources of UK property income, all profits and losses in the year are pooled together for these purposes to give an overall profit or loss for the year. If a taxpayer has a property business loss, then that loss can only be carried forward and set against property income from a UK property business in future tax years. It cannot be set against non-rental income or be carried back to a previous year.
You should note that an overseas property loss, e.g. a loss on a villa in Spain, cannot be set off against UK property business income. This also applies the other way around so there is never any mixing of UK and overseas property business profits and losses. If you have an overseas property business loss, that loss can only be carried forward and set against future overseas property business income.
What is a Furnished Holiday Let?
Profit from properties that satisfy the three qualifying tests for Furnished Holiday Let is taxed following the rental business (property income) calculation rules. In addition to that the property must be located in the UK or European Economic Area (EEA) and commercially let.
Furnished Holiday Lets are treated as trades for tax purposes and therefore have some tax advantages over other lettings.
Profit/loss from that kind of letting is worked out separately from any other rental business to make sure that the special advantages are restricted to the Furnished Holiday Lets that meet the qualifying tests.
What is Rent-a-room relief?
If a landlord is letting out a room to a tenant in their home (i.e. their only or main residence) a special relief is available. Note here that the landlord and tenant will be living in the same property, so the tenant is a ‘lodger’ of the landlord’.
If the tenant pays the landlord a rent of say, £50 a week, this is strictly chargeable to tax as property income. However, where gross rents are not more than £4,250 a year, rent-a-room relief can apply and the rental income is exempt from tax.
Are there any special rules for non-resident landlords?
HMRC has had difficulty in persuading taxpayers who live abroad to pay their tax bill on their UK rental income, therefore they instruct the tenant or letting agent to withhold basic rate (20%) tax from the rent paid. For example, if a landlord charges a tenant £1,000 a month to live in a UK property, they will receive £800 of this and £200 will be sent to HMRC. This is HMRC’s way of collecting tax in the event that the non-resident landlord decides to ignore his UK tax obligations.
If the non-resident landlord prefers, he can make an application to HMRC to receive this rental income gross. HMRC will agree to this if the non-resident landlord completes a self-assessment tax return and pays any income tax due to HMRC. If the landlord has a good record and is up to date with his UK filing obligations and payments, HMRC will agree that the Landlord can receive his rents gross without any tax being withheld at source. Please contact us for further information on this.