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Letting a residential property - general tax advice for Landlords All rental income from UK property is subject to UK income tax, even if you are not resident here for UK tax purposes or may have had to come somewhere else in the UK or abroad because of your job. This fact-sheet provides some general advice on the taxation of rental income but it is always sensible to take specific advice based on your personal circumstances. First Steps You must advise HM Revenue & Customs that you are receiving rents. If you do not do so, you could be liable to pay penalties. You can do this by writing to your own tax office or to your local tax office. You will normally be sent a tax return to complete. Declaring your rental income When you fill in your tax return, separate “Land and Property” pages must be completed to show your rental income, for tax purposes, all your rental income (except from furnished holiday lettings or from a lodger) is treated as being from one property rental business. Profits and losses are calculated using normal accounting rules. This means that rents are taxable as they are earned, not when they are paid. But relief is available if the rent is never paid. Expenses are allowed when you incur the liability, not when you pay the bill. However, a cash basis can be used if the total annual rents are under £15,000. Allowable expenses Expenses allowable in calculating taxable rental income include:
Expenses on improving the property (such as adding an extension or installing central heating), and those which were necessary to bring newly acquired property to a fit state for letting, form part of the capital cost of the property and are not deducible from rents. Allowances for furniture and capital items
You cannot claim capital allowances for plant and machinery in a dwelling house. By concession, an allowance to cover the wear and tear on items such as beds, carpets, curtains, linen, crockery, cutlery, cookers, washing machines and dishwashers, for these, you can choose to claim either the cost of replacement (but not the original purchase) or an annual wear and tear allowance of 10% of the rents received, In addition to this 10% allowance it Is also possible to claim a deduction for the cost of renewal of fixtures such as baths, washbasins and toilets.
Furnished holiday lettings Furnished holiday lettings are treated for many tax purposes as if they were trades. Unlike other domestic lettings, the expenses can include capital allowances on furniture and kitchen equipment, the income counts as earnings for pension contribution purposes, and there are other advantages relating to the disposal of such properties. There are strict criteria to be met for a property to qualify as a furnished holiday let. Overseas landlords If you spend more than 6 months outside the UK, you are an overseas landlord for UK tax purposes. Your letting agent must deduct basic rate tax from the rents before they are paid to you unless you have applied to HM Revenue & Customs to have the rents paid gross and they have written to your letting agent giving authority to do this. The tax deducted is off-set against any liability that you have at the year end and doesn’t affect the amount of tax you pay over all. Similar rules apply to payments by a tenant if you do not have a letting agent. You may also be liable for tax in the country you live in. Disposal of properties Provided you do not buy and sell properties as a business, a disposal is likely to be subject to the normal rules for the calculation of capital gains, Relief is given for enhancement expenditure (such as an extension). Normally, if you sell a property within 3 years of living in it as your main home, any gain will be exempt from UK tax. And even after that time, additional relief of up to £40, 000 may be available where the property has also been let as residential accommodation.
Further advice and assistance with the completion of tax returns can be obtained by calling or emailing Cathy Grimmer at Raven Taxation |