Tax on property income – what you need to know

Types of property income

Residential Property: This involves letting out residential properties on longer tenancy agreements to private individuals as their permanent residence. Typical buy-to-let arrangements fall under this category. The income generated is subject to income tax.

Furnished Holiday Lettings (FHLs): Holiday accommodation let out to tenants for short periods is categorised as FHL. The average occupancy period should be at most 31 days per letter. In addition, the total let periods should be at most 155 days a year. The income from FHL is treated differently than residential property for tax purposes. If you do not let your property for at least 105 days, you have two options (elections) to help you reach the occupancy threshold.

Houses in Multiple Occupations (HMOs): A shared property occupied by at least three people forming two or more separate households falls under the definition of an HMO. This includes student accommodations and properties let out on a room-by-room basis.

The Northern Echo:

Tax treatment of rental income

Residential Property: The net profit arising after deducting allowable expenses is subject to income tax at the landlord’s marginal rate. Interest on mortgages or loans is not allowed to be claimed against income. This means basic, higher, or additional rates based on total taxable income.

Furnished Holiday Lettings: Owners can claim certain Capital Gains Tax reliefs unavailable on residential property. Most expenses can be deducted to arrive at a taxable profit. This is then taxed at income tax rates. Any loss from an FHL can only be offset against future profits from the same FHL business. The qualifying furnished holiday letting conditions must be continuously met for the tax advantages to apply. Otherwise, HMRC may seek to tax it as a residential property letting business.

Houses in Multiple Occupations: Tax treatment is like residential property letting. Rental income left after deducting permitted expenses is subject to income tax at the landlord’s marginal rate.

Allowable expenses

Owners can deduct certain property running costs and finance costs from rental income. Capital costs of purchasing or improving the property are not deductible.

Examples of allowable revenue expenses:

  • Letting or managing agent fees
  • Maintenance and repairs
  • Utility bills, council tax, building insurance.
  • Advertising
  • Accountancy fees
  • Interest on loans funding the property business.
  • Wear and tear allowance, etc.

BUT costs must be wholly and exclusively incurred for the letting business. Private expenditure is expressly disallowed. Moreover, expenses need to be supported by proper invoices and evidence. HMRC does not accept estimates or averages. Landlords must also avoid claiming expenses under multiple properties.

Compliance requirements

Registration: Landlords must inform HMRC about the commencement of new property letting businesses. This also applies when the first FHL/HMO property is acquired. Online registration can be done via the Government Gateway portal. This helps landlords submit tax returns and receive useful alerts/reminders from HMRC. New landlords also get guidance on keeping compliant records.

Tax Returns: Self-assessment tax returns reporting property income and expenses must be submitted. This is regardless of actual tax liability – even nil returns are mandatory.

Deadlines for filing returns are:

  1. October 5, for paper returns
  2. January 31, for online returns

By the same dates, any tax due needs calculation and payment. Interest and penalties apply for late submissions.

Overseas Landlords: Non-resident property owners must register with HMRC on the NRL1 form and file UK tax returns. Further, they must account for tax on rental profits by deducting basic rate income tax before transferring overseas. This can be done by submitting quarterly returns or appointing a qualifying tax agent or property accountant.

UK taxation on property letting income can be complex, with residential, FHL, and HMO lets being treated differently. Landlords and investors must maintain thorough records and meet all reporting responsibilities. Using professional tax consultant or property accountant also aids compliance besides optimising available tax relief claims. Staying current on the latest property tax rules is also highly advisable.

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