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Property letting income

If you receive income from rents from land, furnished or unfurnished property, holiday lettings or from renting out part of your home it will be taxed as the profit from a single property income business. The profits will be taxed as investment income except those from furnished holiday letting and where the business is regarded as a trade.

Overseas Property

If you receive rents from property outside the UK the profit is taxable as an overseas property business. The profit is calculated broadly in the same way as a business in the UK. If you also have let property in the UK you cannot set losses from overseas against the profit from the UK source ( and vice versa).

Profit/Loss Computation

The profits are calculated on a strict tax year basis using the same rules applied where the “business” is a trade. Generally you can claim a deduction for all costs that are incurred “wholly and exclusively” for business purposes.

Where the gross rents are less than £15000 a year you can use the receipts basis rather than the accruals basis in the calculation so long as this is applied consistently. Another useful point is that you do not have to distinguish in the computation between different properties where there is more than one rental source.

Where a loss is incurred it is normally carried forward to a later year and set against future profits.

Expenses

Some of the usual types of expenses are:

Rent, rates, council tax, insurance, utilities and ground rent,

Legal & professional costs of renewing a lease with a term of less than 50 years and the cost of a first letting where it is for less than a year,

Services (Cleaning & gardening),

Interest payable,

Accountancy,

Repairs and maintenance.

Repairs

The cost of improvements is not allowable. Neither can you claim for the cost of renovating a newly acquired property before it was first let if it was not in a useable state when you bought it. Repairs incurred between letting periods are allowable. You can also claim for renewing sanitary ware and double-glazing.

Wear & Tear/Capital Expenditure

An allowance equal to 10% of “net rents” is the more common practice for giving a deduction for wear & tear in the case of furnished accommodation. “Net rents” are based on the rents less payments that would normally be borne by the tenant such as rates and ground rent.

Alternatively you can claim the cost of renewing or replacing the items but you cannot claim the cost of the initial purchase. The renewal basis also applies where the property is let unfurnished.

You cannot claim capital allowances for expenditure on furniture, fixtures and fittings used in a dwelling unless it is either furnished holiday accommodation or treated as a trade. However the wear & tear allowance is usually claimed for simplicity in furnished holiday property situations.

Furnished Holiday Lettings

The property must pass certain conditions for it to qualify as furnished holiday lettings. Firstly it must be let on a commercial basis with a view to making a profit. Holiday lettings are accommodation that is:

Available for commercial letting to the public generally as holiday accommodation for a total period of at least 140 days in a 12 month period.

Let as such for at least 70 days: and

Not normally let to the same person for more than 31 consecutive days during a 7 month period.

The venture is treated as a trade for various tax purposes and the income is not regarded as investment income. Therefore any gain on the sale of the property qualifies for Capital Gains Tax business asset taper relief. In addition the profit counts as earnings for determining the level of income for pension contribution purposes.

Any losses can be treated as a trading loss and set against your other sources of income and not restricted to being offset against other rental profits.

Rent a Room Relief

There is a tax exemption where you let furnished accommodation in your home. Typically it is a situation where you have a lodger with a furnished bedroom and share the family rooms. It does not matter whether you own or rent the property.

The exemption is available on gross rents of up to £4250 and this figure is halved where the property is jointly owned.

If the gross rents exceed £4250 then you have the option to simply pay tax on the excess over the exemption or alternatively calculate the profit on the normal rules for a property income business i.e. gross rents less expenses incurred.

Non Resident Landlords

If you are non resident in the UK for tax purposes and let property in the UK then the normal arrangement is that basic rate tax is deducted at source from the net property income either by the letting agent or, in the case where there is not an agent acting, then by the tenant. This arrangement does not generally apply if the weekly rent is less than £100 per week.

You can apply for this “ tax deduction at source procedure” not to be used by completing a form NRL1 and sending this to Her Majesty’s Revenue & Customs. Further information can be found in HMRC’s booklet IR140.

Lastly

Please remember that you still have to inform HMRC about the letting income even if no profit arises or the profit is less than your personal tax allowance. Records of income and expenditure should also be retained for a period of 5 years and 10 months after the end of the relevant tax year.

This information is for general guidance only. You should always seek professional advice based on your own personal circumstances.