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.
All UK residents with un-taxed income or profits are obliged to notify HMRC by 5th October following the end of the tax year when such income or profit first arose. Landlords must also notify HMRC when gross rental income exceeds £10,000. Unless the taxable amount is under £2,500 and HMRC can collect the tax due through the PAYE scheme, HMRC will require submission of a Tax Return. The landlord’s Tax Return must include the additional property pages. All Income Tax Returns must be filed by 31st January following the end of the Tax Year (the previous 5th April) if filed online, otherwise the deadline is the previous 31st October. The calculation of the tax liability takes into account all the landlord’s other income and allowances, and for this reason is necessarily complicated.
SALE OF PROPERTY
On disposal of the property any increase in value is potentially subject to capital gains tax. The gain is calculated by comparing the sales proceeds with all the acquisition costs. Some reliefs are available and there is a personal annual exempt amount. Substantial reliefs are available if the landlord has lived in the property at any time as his only and principal private residence.
You are resident in the UK if you normally live in the UK and only go abroad for holidays and short business trips. If you believe you may be non-resident then you must pass several precise tests.