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 £10,000 or more (before deducting allowable expenses), you are required by law to file a self-assessed tax return.
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 codlings, please see the relevant other FAQ sections.
What is a ‘property income’?
A UK property business is a business which a person carries on for generating income from land in the UK. For example, property income from a UK property business includes rents from properties in the UK such as houses and flats. If a taxpayer owns some land 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.
What if I am a UK non-resident landlord?
Income received from non UK properties, will be exempt from UK tax.
If a tenant living in the UK rents a property from a landlord who lives outside the UK, even though the landlord doesn't live in the UK, he will still be taxable in the UK on this UK rental income, because the property is situated in the UK.
How are property business profits calculated?
For both UK and foreign properties - rents receivable less expenses payable. HMRC apply the accruals basis. This involves taking rents receivable rather than rents received. ‘Receivable’ means the rents that relate to a tax year, which is not necessarily the same as cash physically received.
From rents receivable you deduct any allowable expenses payable. ‘Payable’ means expenses that relate to the tax year. This may not necessarily be equal to cash physically spent.
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 agent fees, commissions and genuine repair expenses. For example, if a tenant breaks a window and you repair that window this is a genuine repair and the costs can be deducted from rents.
Any water charges or council tax paid by a landlord are deductible expenses, as is any interest paid on a loan taken out to purchase the property in the first place. Insurance premiums are also deductible.
What about capital expenditure?
Any expenditure of a capital nature cannot be deductible from rents – i.e. any expenditure that improves or enhances the value of the property.
E.g. if instead of simply repairing some broken roof tiles, a landlord takes the opportunity to replace his whole roof, there is obviously some degree of improvement here and the costs will not be deductible.
However, capital allowances (essentially depreciation tax relief) may be able to be claimed in respect of capital expenditure used in the rental business. For example capital allowances can be claimed in respect of tools such as ladders and lawnmowers which are used in the property business.
How can I be compensated for dilapidation of furniture, furnishings etc?
A wear and tear allowance can be claimed in respect furnished lettings. Basically, a deduction of 10% of the relevant rental amount is taken when calculating the profits of the property business. If a landlord does not want to claim wear and tear, there is an alternative called the renewals basis – which means that the landlord cannot claim a deduction for the initial costs of any furniture he buys, but when the furniture is replaced, the costs of replacements can be included as allowable expenses.
Where wear and tear allowance is claimed no other relief is available in respect of expenditure incurred on furniture and furnishings etc. Landlords must either adopt one basis or another – they cannot change between wear and tear and the renewals basis when it suits them.
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. Nor can it be carried back to a previous year.
You should note that an overseas property loss, eg 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?
A Furnished Holiday Let is a special type of property that can benefit from certain tax advantages. Contact us for further information on this.
What is Rent-a-room relief?
If a landlord is letting out a room to a tenant in his home (i.e. his 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, so what they ask the tenant or letting agent to do is withhold basic rate tax from the rent paid. For example, if a landlord charges a tenant £1,000 a month to live in a UK property, he will receive £800 of this and £200 will be sent to HMRC. This is HMRC’s way of getting some tax in, in the event that the non-resident landlord decides to ignore his UK tax obligations.
If the non resident landlord prefers, he or she can make an application to HMRC to receive this rental income gross. HMRC will agree to this if the non-resident landlord promises to file a self-assessment tax return and pay his income tax in the normal way. If the landlord has a good record and is up to date with his obligations etc, HMRC will agree to him receiving his rents gross. Contact us for further information on this.