Property has traditionally been viewed as a ‘safe’ investment, which gradually appreciates over a long period and very seldom loses in value. The UK rental market has seen both slumps and booms in recent years, with a period of rapidly dropping house prices, followed by similar increases well above the rate of inflation. However the market has steadied in the last year or two and residential lettings provide a steady income with attractive yields and the prospect of increases in property values above the level of inflation. Many lenders now run ‘buy to let’ schemes so that you can purchase a property for letting with a mortgage, with the repayments being covered by the rent.
Even though you may make a paper loss in income terms after deducting available expenses, you will need to submit a tax return even when a return is not automatically issued to you each year. If no return is issued, you must advise the Inland Revenue of the existence of an income tax liability by 5 October following the tax year end. You should then receive a tax return and you pay the tax by the following 31 January. There are, however, plenty of opportunities to minimise your tax liabilities on property lettings, by ensuring you claim tax relief on all legitimate expenses. The Tax Lady will help you make sure you pay only the tax due.
If you use a letting agent they will supply you with full details of the rental income and the expenditure which they incur on your behalf. In virtually all cases, however, there will be other tax-deductible expenses which will not involve the letting agent and you need to ensure that you claim everything to which you are entitled.
Here is a checklist of typical expenses you can claim, if they are not paid by the tenant:
|mortgage interest on a loan to purchase the property
|ground rent and service charges
| insurance premium for property and contents
| agent’s charges
| inventory costs
| maintenance and repairs
| up to 2016 10% wear & tear allowance where let furnished
(from 2017 this is replaced by 'Replacement of Domestic items relief, which is also available to unfurnished properties, but only for replacement of existing items)
| Advertising for tenants
| gardening and cleaning
| accountancy fee
(Yes! If I prepare your rental accounts, the fee is tax deductible!))
| Some travel expenses
| sundry expenses such as council tax; gas; electricity; telephone; that you may have to pay whilst the property is empty
Up to now, all interest that you pay on a mortgage to buy let property has been allowable against tax, but from 2017 this will be reduced, only 75% being allowable in 2017, 50% in 2018, 25% in 2019 and NIL in 2020, when it will be replaced by a basic rate tax relief. This doesn't apply to commercial properties or furnished holiday lettings.
RENT A ROOM RELIEF
This is an exemption given to encourage people to rent out spare rooms in their own homes to residential tenants. If you let out a furnished room in a property in which you live (not a self-contained flat) then the first £7,500 of rent which you receive each year will be tax free.
FURNISHED HOLIDAY LETTINGS
This type of letting, unlike ordinary property letting, is treated as trading income, which means that there is more scope for getting tax relief.
| The income will count as ‘net relevant earnings’ for pension purposes so enabling contributions into a personal pension scheme.
| If you make a loss on the letting you can set it against other income in the same year, unlike other lettings where the loss can only be carried forward to set against future income from lettings).
| There is no additional capital gains tax on a sale of a property which qualifies for furnished holiday lettings treatment. (see my CAPITAL GAINS TAX page for more details).
To qualify as furnished holiday lets the property has to be situated in the UK (so your French gite sadly doesn’t qualify) and must be available for letting to the public as holiday accommodation at the market rent for at least 140 days in a 12 month period and actually be let for at least 70 of those days.
It must not be occupied by the same person for more than 31 consecutive days at any time during the period of 7 months within the 12 month period.
Occupation by yourself as the owner for part of the year will not of itself disqualify the property as long as the other requirements are met, but a deduction will be made for private use.
CAPITAL GAINS TAX
When you sell a property that is not your only or main residence, then capital gains tax will be chargeable on the profits of the sale.
If the property has at any time been used as your private residence, then the gain will be apportioned between the ‘private’ and ‘let’ periods of ownership by reference to the number of months of each type of occupation and the private proportion will be exempt from Capital Gains Tax.
Ask The Tax Lady before selling an investment property as timing can be important in reducing your tax bill.