Taxation Related to Rental Property

The following information is a guide to the laws for taxation relating to property. It is provided in good faith for guidance only and must not be relied on. We recommend that you seek independent advice from a specialist taxation accountant or financial adviser.

Questions

Tax on Buying Property
Tax on rent from residential property lettings
Expenses and allowances on income from property
Tax on selling property
Taxation of Non-resident Landlords
Record keeping for landlords

Answers

Tax on Buying Property

If you buy a property in the UK over a certain purchase price you have to pay Stamp Duty Land Tax (SDLT) which is charged on all purchases of houses, flats and other land and buildings. As the buyer of the property, you are responsible for completing the land transaction return and paying the SDLT, however, in practice; your solicitor will usually handle this for you and send it to HMRC on your behalf.

Purchase price of residential property	Rate of SDLT
£0 - £125,000	0%
£125,001 - £250,000	1%
£250,001 - £500,000	3%
£500,001 or more	4%

Check current break-points and rates of SDLT on the HM Revenue & Customs (HMRC) website.

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Tax on rent from residential property lettings

Properties that you let out for people to live in as their home count as 'residential lettings' and for tax purposes treated as a single business, even if you let out more than one property. If you let out several properties, you can offset losses from one against profits from another. You pay tax on any profit as part of your overall income.

To Calculate Tax Owing

You work out your 'net profit' as follows:

add up all your rental income
add up all your 'allowable expenses'
take your allowable expenses away from your income

Group all the income and the expense figures together for all your residential lettings.

Your taxable profit takes account of any allowances you're entitled to from your net profit.

If you let furnished property, you can deduct either of:

A 'wear and tear' allowance which is based on a percentage of your rent
A 'renewals' allowance based on the cost of replacing old items with new equivalents less money from sale of the old item

Certain 'capital' allowances for the cost of equipment relating to your lettings business may also be deductible - check details with the HMRC.

Declaring and paying tax on your rental income

If your total income from UK property is £15,000 or more in a tax year you must declare it on the full Self Assessment tax return. If it's under £15,000 you may be able to complete a shorter four-page return. If your taxable income from property is under £2,500 your Tax Office may be able to collect any tax you owe through PAYE (Pay As You Earn) if you already pay tax this way.

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Expenses and allowances on income from property

If you let out property, you can deduct certain expenses and tax allowances from your rental income to work out your taxable profit (or loss).

Allowable expenses

letting agent's fees
legal fees for lets of a year or less, or for renewing a lease for less than 50 years
accountant's fees
buildings and contents insurance
interest on property loans
maintenance and repairs (but not improvements)
utility bills (like gas, water, electricity)
rent, ground rent, service charges
Council Tax
services you pay for, like cleaning or gardening
other direct costs of letting the property, like phone calls, stationery, advertising

Bear in mind that you can only claim expenses that are solely for running your property letting business. If the expense is only partly for running your business (or if you use the property yourself) then you may only be able to claim part of it.

Non-allowable expenses

When you work out your profit, you can't deduct:

'capital' costs, like furniture or the property itself
personal expenses - costs that aren't to do with your letting business
Public services all in one place
any loss you make when you sell the property

But you may be able to claim some allowances instead.

Allowances that can reduce your taxable profit

There are different types of allowance you may be able to claim for your capital costs. Capital costs include expenditure you make on assets like furniture and machinery. The allowances you can claim for some of your capital costs vary according to the type of letting.

Whatever the type of letting, you can claim a capital allowance on the cost of things that you need for running your property letting business, like cleaning and gardening equipment. You can also claim for equipment that isn't for the use of a single let property, like a boiler that heats more than one property.

Landlord's Energy Saving Allowance

In 2004 the Government introduced a tax allowance called the LandlordÕs Energy Saving Allowance (LESA), allowing private landlords to claim back money when they improve the energy efficiency of their rented properties. This is a very simple process with expenditure offset against tax through your annual tax return form, up to a maximum of £1,500 per property (further information can be found at http://www.changeworks.org.uk/uploads/AW%20Landlord%20Factsheet%20LESA.pdf

How much capital allowance can you claim?

Allowance's depends on what you buy, usually you can claim 50 percent of the cost when you buy it - but sometimes 100 percent is allowed for some environmentally friendly expenditure. Each year after that, you can claim 25 percent of what's left. HMRC changes the percentages from time to time. The allowance is deducted along with other expenses in calculating your profits.

Which year do expenses belong to?

You have to allocate expenses to the year they apply to - it doesn't matter when you actually pay them. Sometimes you may have to allocate part of an expense to one year and part to another.

Losses

Normally, if your letting business makes a loss, you can carry it forward to a later year and offset it against your future profits from the same business.

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Tax on selling property

If you're selling a property that is your main home you won't have to pay tax on it. If you're selling a property that isn't your main home, it is likely that you will have to pay Capital Gains Tax (CGT).

Tax on the sale or disposal of your main home

You do not have to pay tax as long as:

you bought it primarily for use as your home and expenditure on it was not with a view to making profit
the property was your only home throughout the period you owned it (ignoring the last three years of ownership)
you used it as your home all the time that you owned it and, throughout that period did not use it for any other purpose
the area of grounds sold with it does not exceed 5,000 square metres including the site of the house

If you are married or in a civil partnership and not separated you may both have only one such residence between you. Even if the above are not met, you may still be entitled to tax relief.

Tax on property that's not your main home

You will normally have a chargeable gain if your property is worth more than you paid for it when you sell or dispose of it. However, currently there is an allowance against some of your total taxable gains which is tax free. HMRC will advise the current amounts and rates.

It's worth bearing in mind that:

when working out the chargeable gain you can deduct some of the costs of buying, selling and improving the property
if you have made a loss on the property, you may be able to set that off against other chargeable gains you may have
if you are living together you can transfer property to your husband, wife or civil partner

Without having to pay CGT, but if you give it or sell it cheaply to your children or to others, you may be liable to pay CGT.

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Taxation of Non-resident Landlords

As per the foregoing, UK generated rental income is liable to UK tax whether the landlord lives in the UK or not. Landlords resident or not resident in the UK have since the Taxes Management act 1970 been liable for UK tax on rental income.

This act has been further superceded by The Finance act 1995 which places a clear duty on the agent to deduct tax at source to be paid quarterly to HMRC.

Agent's Liability

Until we are in receipt of an exemption certificate from the Inland Revenue we will deduct tax at the unearned income rate from rent received. It is therefore essential that you return a form NRL1 to HMRC as soon as the decision is made to let your property.

It is your responsibility to submit the NRL1 to the appropriate address on the form and guidance notes. NB Civil Servants and servicemen will be required to send their forms to the office in Cardiff.

Application by a non resident landlord to HMRC by means of form NRL1 enables an individual whose usual place of abode is outside the UK to apply to have his or her UK rental income paid without deduction of UK tax.

Landlord's Tax Liability

Approval of your application does not mean that the rent is exempt from UK tax. Declaration of your tax UK tax liability is made to HMRC by completing a UK Self Assessment Tax Return declaring all your income and expenses as though living in the UK. Rental income is considered to be unearned income and a tax liability exists at the current rate.

Landlords that fail to provide us with a valid UK address, with a postcode or a care of address will have tax deducted as above.

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Record keeping for landlords

If you let out residential property, you will have to keep records of rent received and your expenses to work out the profit you'll pay tax on. You work out your taxable profit by taking your expenses and certain allowances away from your rental income.

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This document has been processed from information provided by HMRC and DirectGov. It was correct at the date published but it is your responsibility to ensure that tax owed is correctly calculated and declared to HMRC. For current information, you must refer to the appropriate office dealing with your tax affairs or the relevant website. Some useful links follow: