Guide for UK resident landlords
All the basics of UK tax for your property business.
Guide for UK resident landlords investing in UK property
Tax on rental income: in this section, you will find a guide aimed at UK resident landlords with investment property in the UK.
Summary
This summary relates to a residential letting business, which is applicable to most individual landlords. Special rules apply to the RENT A ROOM scheme and to HOLIDAY LETS, until 5th April 2025, after which date they are treated the same as any other rental. Hotels and Guest Houses are also excluded from these general rules.
Rents and allowable expenses
Rental income, minus allowable expenses, is taxable as part of the taxpayer’s total UK income. Allowable expenses must be wholly and exclusively incurred in the course of the letting business, though some exceptions may apply in specific cases. It is crucial to distinguish between initial costs, capital costs, and running costs. Capital and set-up costs, which are capitalised, are typically deducted when calculating the gain on the sale of the investment property. The cost of improvements generally increases the property’s base cost. Not all initial or capital costs will be allowable.
One of the biggest expenses will often be the mortgage or loan interest. From 5th April 2020 none of the interest is allowable in calculating profit, but 20% of the interest paid is potentially available to be deducted from your tax bill and what is not used is carried forward to the next year.
The lettings agent will incur other costs and as long as these represent routine maintenance these too will normally be allowable. The replacement of furniture and equipment on a like-for-like basis is fully allowable. No allowance is given for the cost of initial furnishings or equipment.
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How is RENT determined?
For UK tax purposes rent is the cash paid by your tenant to you or your agent in the tax year. Different rules apply if the amount is more than £150,000 or if the owner is a company. An individual may also elect to use the accruals basis but this is rarely done.
How are LOSSES treated?
Special rules apply to the treatment of losses. While profits are added to a taxpayer’s income and taxed at the taxpayer’s highest rates, losses generally may not be set-off against income from other sources, except for losses created in a property business by Capital Allowances. Capital Allowances are not available in respect of residential property. Losses may be carried forward to offset future profits of the same property business.
Who needs to file a Tax Return?
All UK residents with income or profits, that are not taxed or are not taxed at the correct rate, are obliged to notify HMRC by 5th October following the end of the tax year when such income or profit first arose. 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.
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What makes an individual UK Resident?
You are probably resident in the UK if you normally live in the UK and only go abroad for holidays and short business trips. You are always resident if you spend 183 or more days in the UK in the current year. If you believe you may be non-resident, then you must pass several precise and very complicated tests – please contact us.
What happens when a property is sold?
If you are disposing of a UK residential property you MUST report the transaction and pay any tax due within 60 days of transfer (completion). In addition, such a transaction plus disposals of any other type of asset must be reported with the annual Self Assessment Tax Return.
On disposal of the property by a UK resident, 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.
