Here are some of the main points to be aware of:
- The income is treated as the profits of a Property Income Business. If the owner of the property is an individual or a trust the profits are charged to income tax for the tax year to 5th April. If the owner is a company the profits are charged to corporation tax for the accounting period of the company. Although letting property is generally regarded as an investment activity , the accounting rules for working out trading profits are applied. Allowable expenses are broadly those whose benefit is only felt in the immediate period, and do not affect more than one year. The costs incurred must also be wholly and exclusively for the purposes of the letting. So for example, an adjustment must be made where there is a private element of the expenses. Interest payable on a loan to acquire or improve the property is allowable.
- Capital allowances are not available on plant and machinery used in dwellings. However, owners of furnished properties can claim a wear and tear allowance of 10% of the net rents to allow for the cost of replacing furnishings, etc. Net rents is the rent less any expenditure that would normally be incurred by the tenant, such as heat and light. This is normally the best option although it is possible to claim relief for furnishings and fittings on a renewals basis whereby no relief is given for the original cost but full relief is given for the replacement cost when that occurs.
- The cost of repairs can be set against the rental income, but it is often difficult to distinguish between repairs and improvements. Where a fixture is replaced with a similar fixture this will usually be an allowable deduction as a repair but where a new fixture is installed where one did not exist before or the size or quality of the replacement fixture represents an improvement in the value of the property no tax deduction is given against the rental income. The tax relief for improvements is given when the property is sold.
- Landlord’s Energy Saving Allowance – landlords that incur capital expenditure up until 5th April 2015 to install loft insulation, cavity wall insulation or floor insulation in residential property may claim a deduction against rental profits of up to £1500 per property.
- The expenses and income of different properties owned by one person in the UK are pooled together in any one tax year, to reach an overall profit or loss for the letting business. Any overall loss is normally carried forward to set against later rental income. However, relief is available for excess capital allowances to be set against other income of same and/or following year.
- When the property that is let is situated abroad the calculations of taxable income are very similar, but tax may be payable in the country where the property is situated, as well as in the UK.
- Where the landlord of a UK property is non resident, basic rate tax should normally be deducted at source from the net rental income by the letting agent or by the tenant, unless HMRC have agreed that the landlord will complete a self-assessment tax return in the UK.
- There are special advantageous rules which apply to properties which qualify for furnished holiday lettings.
- Capital gains on the sale of buy to let properties are taxed at 18% or 28%.
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