Landlords Tax Services Ltd - The on-line Tax Service for the Residential Property Landlord

Overview

This overview relates to Schedule A Business which is applicable to most individual landlords. Special rules apply to the Rent a Room scheme and to Holiday Lets. Hotels and Guest Houses are also excluded from these general rules.

Rents & allowable expenses

Rents less allowable expenses are taxable as part of the taxpayers total UK income. The main rule for allowable expenses is that they must be wholly and exclusively incurred in the course of the letting business. It is important to differentiate initial and capital costs from running costs. Capital costs and set-up costs, which are capitalised, are usually relieved for tax purposes against the calculation of the gain on sale of the investment property. The cost of improvements is normally treated as increasing the base cost of the investment.

The two biggest items allowable as a deduction in calculating taxable net rental income will often be loan (or mortgage) interest and travel where the cost is solely attributable to maintaining the rental income. The lettings agent will incur other costs and as long as these represent routine maintenance these too will normally be allowable. For furniture etc in a house a wear and tear allowance is given equal to 10% of the rent.

Basis of determining "rent"

The rental income for small lettings (under £15k p.a.) is normally calculated as the cash received. Taxable rent from all other lettings are taxable on an earned or receivable basis though relief is normally given for non-recovered rental.

Losses

Special rules apply to the treatment of losses. While profits are added to a taxpayer's income and taxed at the taxpayers highest rates, losses generally may not be set off income from other sources other than some types of other property income. Losses may be carried forward to offset future profits, with some restrictions on the type of profits they may offset.

Non-residents

Special rules apply to non-resident landlords. A person is subject to income tax in any year in which he/she is resident in the UK (with special rules in the years of emigration and immigration). A person is subject to Capital Gains Tax (CGT) in any year in which he/she is ordinarily resident in the UK. A five year rule applies for Capital Gains Tax purposes for those who emigrated from the UK. If you are in the UK for 183 days or more in the tax year, you are always treated as being resident. You may be treated as being resident if you regularly make substantial visits but are in the UK for less than 183 days. You are treated as being ordinarily resident if you come to the UK regularly and your visits average 91 days per tax year measured over a rolling 4 year period, or if you come to the UK for a settled purpose or are resident there for three or more tax years, or come to the UK intending to stay for more than three years.

Tax Deduction

Since 6th April 1996 managing agents must deduct basic rate tax from the rents collected and pay this to the H.M. Revenue & Customs each quarter. Where there is no managing agent the obligation to deduct and pay to the H.M. Revenue & Customs the basic rate tax falls on the tenant, unless the rent falls below a de minimis figure.

Exemption

Landlords can apply (on form NRL 1) for a formal H.M. Revenue & Customs approval to receive rent gross, and on receiving this, the managing agent then need not deduct tax. This exemption will be withdrawn if the landlord fails to keep his/her tax affairs up to date. It does not exempt the landlord from tax on rental income.

Tax Returns

The non-resident landlord should make an Income Tax Return unless he/she has been told in writing by the H.M. Revenue & Customs that a Return is not required. The Tax Return is made up to 5th April each year and must be submitted by 31st January following the end of the Tax Year.

Personal Allowances

Citizens of the EEA (EU + Iceland, Liechtenstein & Norway) and of the Commonwealth and countries with which the UK has an appropriate Double Taxation Agreement are entitled to the annual Personal Allowance - an amount that may be received free of tax (see rates & tables).

Sale of the Property

People who are neither resident nor ordinarily resident in the UK are generally exempt from Capital Gains Tax. However qualification for non-resident status for those who were once UK resident is complex. Contact us for details.

This note is provided as a general overview. It should not be relied upon for taxation purposes, as it cannot provide a complete analysis of the law in any particular circumstance. Taxation is complex and the client should take advice specific to his/her own circumstances. Landlords Tax Services Ltd cannot accept any responsibility for any loss suffered as a result of reliance on the foregoing overview. We will be pleased to advise on any individual situation.