All UK rental properties that you own personally will be included in one “UK property rental business” for tax purposes but how are they taxed?
Rental income and allowable expenditure must be returned to HMRC via your self assessment income tax return. Although profits and losses are calculated in the same way as that for a trade, the income is characterised as investment income for tax purposes and is taxed on the basis of income arising in the UK tax year ending 5 April.
Profits and losses arising on different properties may be offset against one another in the same period, but an overall net loss arising in any year may only be carried forward to offset future profits in this business. Losses may not be used to offset income arising from other sources.
Relief against rental income will only be available for non capital expenses incurred “wholly and exclusively” for the purposes of the rental business.
The more common types of allowable expenditure include:
• Loan interest
• Council tax, water rates, etc
• Managing agent’s fees
• Legal & professional fees relating to the letting, not purchase of the property
Expenses incurred before the rental business begins
The rental business will commence for tax purposes when the property is first let. Expenditure incurred prior to that date, eg, finance costs, interest, fees, advertising, may be treated as incurred on the commencement date of the business and deducted from rental income in the first taxable period.
This may give rise to a loss in the first period. As noted above, the loss would only be available to be carried forward to offset net rental income in a future period.
The purchase of the property and all related costs of purchase are capital costs. They will form the base cost for capital gains tax purposes on a future disposal of the property.
Future costs of repairs and maintenance of the property should be allowable expenditure and deductible against rental income for tax purposes. Any element of improvement, however, may render the whole cost a capital cost and, therefore, not allowable against income.
Where the property is let furnished, the alternative to claiming the cost of replacement fixtures and fittings as incurred is to opt for an annual “wear and tear” allowance which is equal to 10% of rental income after deducting council tax and water rates.
This summary covers the main issues and types of deductible expenditure. Specific advice should be taken in respect of your own circumstances
Richard Harvey - Tax Director, Bird Luckin
Bishop's Stortford: 4 High Street, Bishops Stortford, Herts. CM23 2LT• Sales & Lettings: 01279 657 666
Stansted Mountfitchet: 33 Cambridge Road, Stansted, Essex. CM24 8BX• Sales & Lettings: 01279 815 511
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