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 taxpayer’s 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 though some relaxation of this rule may be available. 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 attributable solely to maintaining the rental income. However from 5th April 2017 there will be a gradual reduction in the amount of tax relief given for mortgage or loan interest. The lettings agent will incur other costs and as long as these represent routine maintenance these too will normally be allowable. From 5th April 2016 the replacement of furniture and equipment on a like for like basis is fully allowable and there is no longer a Wear and Tear Allowance. No allowance is given for the cost of initial furnishings or equipment.
Basis of determining “rent”
Until 5th April 2017 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 unrecovered rental. After 5th April 2017 the default basis for calculating rental income will the the cash basis.
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.
Special rules apply to non-resident landlords (see tax deduction below). A person is subject to income tax in any year in which he⁄she has any income arising in the UK which is untaxed or not taxed at the right rate (with special rules in the years of emigration and immigration).
With effect from April 2015 all disposals by non-residents attract Capital Gains Tax (CGT) on the gain accruing after that date on the disposal of residential property. Disposal by non-residents prior to that date do not attract CGT except for disposals by persons temporarily non-resident. Disposals of other assets by non-residents do not attract CGT.
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.
Landlords can apply (on form NRL 1i) 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.
The non-resident landlord must 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 when filed on line. Non-residents cannot now use the HMRC on-line tax return filing software.
The Personal Allowance is an amount that may be received free of tax (see rates & tables). Citizens of the EEA (EU + Iceland, Liechtenstein & Norway) are entitled to the Personal Allowance wherever they are resident. Citizens of the Commonwealth and countries with which the UK has an appropriate Double Taxation Agreement are entitled to the annual Personal Allowance if they are resident in their own country.
Sale of the Property
Until April 2015 the gains made on disposals made by people who are non-resident for five tax years or more are generally outside the scope of UK tax. Gains accruing after 5th April 2015 on disposals of residential property occurring after 5th April 2015 and made by non residents are subject to UK Capital Gains Tax.