UK RESIDENT LANDLORDS

FREQUENTLY ASKED QUESTIONS

THE BASICS

Is my letting income taxable in the UK?
How can I minimise the tax I have to pay?
What kind of expenses can I deduct?
Am I eligible for any UK tax free allowances?
Suppose the UK tax authorities don’t know about my rental income?
How do I register with the UK H.M. Revenue & Customs?
Will I have to make UK Tax Returns?
How will I know I’m paying the right amount of tax?

CAPITAL GAINS TAX

Before buying my investment property I had two abortive purchases. The legal and survey fees amounted to about £1,500. Can I claim tax relief on these?
I live in the UK and have owned a property in Coventry, which I have let out for the past five years. I am now thinking of selling it. The current value is about £100,000 more than I paid for it. I have heard that non-residents do not pay Capital Gains Tax – should I move overseas?
I have lived in my property and then moved away and let it out. I am now thinking of selling it. I know I will have to pay tax on the gain in value. What allowances are available against the gain?

INCOME TAX

I am going abroad to work for three years and want to rent out my home. My letting agent has told me that I will be taxed on my rental income at 20% unless I complete a form now and will then have to complete UK Tax Returns. Is there any advantage to me in dealing with all this paperwork?
I have just furnished a house and put in a new bathroom to rent it out. What allowances do I get for the cost of the furniture and bathroom?
I intend to buy a property to let. It will need a new kitchen and some treatment of the timber in the property. Will I get tax relief on the cost of this?
I live in the UK and rent out a house that I own in my home town. My calculations show that after deducting interest etc I now make a small loss each year. Can I offset this against my other income (salary and deposit interest) in arriving at my total personal tax liability?
I am buying to let a property with a rather complicated legal position. I have been warned that the fees may be quite high. What tax relief do I get on legal fees?
I want to rent my property to a relative who cannot afford the full market rent. What are the taxation implications of this?
Before buying my investment property I had two abortive purchases. The legal and survey fees amounted to about £1,500. Can I claim tax relief on these?

THE BASICS

Is my letting income taxable in the UK?

Yes.

How can I minimise the tax I have to pay?

Deduct the allowable expenses of letting from the gross rents and claim UK tax free allowances.

What kind of expenses can I deduct?

All the expenses directly related to maintaining and running the property, arranging the lets and collecting the rent. If you borrow to buy the property the interest you pay will attract some tax relief but this will reduce between 2017 and 2020.

Am I eligible for any UK tax free allowances?

Yes, if they are not already set against other income.

Suppose the UK tax authorities don’t know about my rental income?

The UK H.M. Revenue & Customs have arranged matters to ensure they will know about it. Your lettings agent makes regular returns to the H.M. Revenue & Customs. It is also a serious offence if you don’t tell HMRC.

How do I register with the H.M. Revenue & Customs?

Ask Landlords Tax Services Ltd to complete and submit a form SA1 for you.

Will I have to make UK Tax Returns?

Yes. Once a year unless instructed in writing by HM Revenue & Customs to do otherwise.

How will I know I’m paying the right amount of tax?

We will calculate it and advise you.


CAPITAL GAINS TAX

Before buying my investment property I had two abortive purchases. The legal and survey fees amounted to about £1,500. Can I claim tax relief on these?

No, I am afraid not.

I live in the UK and have owned a property in Coventry, which I have let out for the past five years. I am now thinking of selling it. The current value is about £100,000 more than I paid for it. I have heard that non-residents do not pay Capital Gains Tax (CGT) – should I move overseas?

From April 2015 gains arising on disposals of residential property by non-residents is subject to Capital Gains Tax on the amount of the gain that has arisen after that date. The gain that arose before that date will generally not be subject to UK Tax. However to qualify you would have to be non-resident for at least five full tax years.

Moving abroad for five or more years is a life-changing decision for most people and not one that should be driven by tax considerations. Residency is determined by a complicated set of tests contained within the statutory residency test.

Capital Gains Tax is in itself a complicated subject. Residency is also a very complicated subject. The interaction of the two means you must get specialist help if you are seriously considering moving abroad to save tax.

Download Statutory Residency Test here.

I have lived in my property and then moved away and let it out. I am now thinking of selling it. I know I will have to pay tax on the gain in value. What allowances are available against the gain?

The calculation of CGT is complicated and it is not possible to deliver an exhaustive lesson on CGT here. The following may be taken as being only the briefest glimpse of some of the allowances and reliefs that may be available in your case. The starting point for calculating the gain is the difference between the cost and the selling price. You may add to the true cost all the legal and other costs of acquisition. The selling price may be reduced by the costs of disposal. Special rules apply to properties owned since before 6th April 1982. The gain is assumed to have accrued evenly over the period of ownership of the property. The gain accruing during the period when it was your principal private residence may be ignored and the gain accruing when you were not resident in the property is taxable subject to the following exemptions and concessions. Where a residence has been the owner’s only or principal residence at any time during his period of ownership, the last 18 months of ownership are treated as a period of residence and the gain accruing then is normally exempt. Certain other absences may count as a period of residence: any absence throughout which the owner is employed abroad, and up to four years for certain work related absences. Some of the above apply where the person is self-employed.

There is also a further relief for owners of properties that have been at some time their principal private residence and which for some time have been let for private accommodation. The gain attributable to the period when the property was let is reduced by the lower of a) £40,000 and b) an amount equal to the part of the gain that is exempt because of the owner occupation c) the taxable gain.

The interaction of the various reliefs makes this a very complicated subject and the above should not be relied upon when calculating your tax liability. Nor should you assume that all or any reliefs, exemptions, allowances or concessions are available to you. You should always take professional advice specific to your own circumstances.


INCOME TAX

I am going abroad to work for three years and want to rent out my home. My letting agent has told me that I will be taxed on my rental income at 20% unless I complete a form now and will then have to complete UK Tax Returns. Is there any advantage to me in dealing with all this paperwork?

The answer is “yes” because since April 2010 all non-residents with a source of income in the UK have been obliged to register for self-assessment and to file tax returns annually unless HMRC says, in writing that they do not need to do so. Agents collecting rent for non-resident landlords are obliged to deduct tax at (currently) 20% of the rent after deducting the small number of expenses that they are aware of unless HMRC advises them in writing not to do so. The form you are being asked to complete now is the NRL-1 which is an application for relief from the obligation to have tax deducted at source. Once this permission is granted you will have to keep your tax returns up to date or it will be withdrawn. The advantage to you is that the calculation of the amount taxable looks far more attractive. In arriving at the taxable amount you may now deduct all those expenses you have incurred in maintaining the rental income that your agent did not know about. These include the loan interest you have paid on any loan you took out to buy the property or bring it up to its present standard (but note there is a gradual restriction of relief for loan interest starting April 2017). In addition if you are a EU citizen or a citizen and resident of another qualifying country you will still get all your UK personal allowances to set against your UK income. Currently this will give you an additional amount of about £11,500 tax-free. For most people the actual tax paid is considerably lower than if you took the lazy way out and just put up with the 20% deduction. And of course the 20% deduction does not let you off making returns.

I have just furnished a house and put in a new bathroom to rent it out. What allowances do I get for the cost of the furniture and bathroom?

Allowances for capital items are called Capital Allowances. Capital Allowances are not available in respect of furniture or furnishings in a dwelling house. In respect of the bathroom and any other items that are an integral part of the building it is important to differentiate between repairs and improvements. No allowance is given for expenditure on improvements (though some relief may be available against Capital Gains Tax when you sell) but expenditure on repairs to such items is normally allowable. Replacing an old and worn bathroom suite and redecorating the bathroom is normally allowable.

I intend to buy a property to let. It will need a new kitchen and some treatment of the timber in the property. Will I get tax relief on the cost of this?

Expenditure to make good dilapidation that occurred before you bought the property is normally allowable as long as the property was in a useable state when acquired. The real test is whether you bought the property at a discount because of its poor state of repair.

I live in the UK and rent out a house that I own in my home town. My calculations show that after deducting interest etc I now make a small loss each year. Can I offset this against my other income (salary and deposit interest) in arriving at my total personal tax liability?

No. Generally losses on rental income can only be offset against profits on other rental income of the same year or may be carried forward to offset future profits on lettings.

I am buying to let a property with a rather complicated legal position. I have been warned that the fees may be quite high. What tax relief do I get on legal fees?

The costs associated with the acquisition of the property are treated as part of the acquisition cost and most are allowable in the calculation of the capital gain arising when you sell. Costs of the first letting are not allowable unless it is for less than a year but the costs of renewing a short lease are allowable.

I want to rent my property to a relative who cannot afford the full market rent. What are the taxation implications of this?

If you rent a property to a connected person it is likely that the H.M. Revenue & Customs will ask whether the rent being charged is at a commercial rate. If the rent is below the market rate then the allowable expenses may be restricted so that any loss is ignored, and is not available for offset in the year or in any future year.

Before buying my investment property I had two abortive purchases. The legal and survey fees amounted to about £1,500. Can I claim tax relief on these?

No, I am afraid not.

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.