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1 Minute Guide to ... Tax on Rental Income
(May 2004)
Introduction
'Buy to let' is certainly a popular subject on TaxationWeb's Tax Tips Forum. Indeed, with many individuals choosing property investment over pensions in terms of providing for their retirement, property rental in general is attracting increasing attention. With this in mind, here is a 1 minute guide to tax on rental income.
10 Key Points
- 'Schedule A Business' Profits
Income tax is normally charged on rental and certain other income arising during the tax year, calculated as if the 'business' was a trade. This means that expenses are generally allowable if incurred 'wholly and exclusively' for business purposes (e.g. overdraft interest charged to the business account).
- Losses
Profits and losses from more than one property are generally pooled together, and if an overall rental business loss arises it is normally carried forward and set off against future Schedule A business profits. Losses relating to capital allowances may instead be offset against total income of the same (or next following) year.
- Capital Expenditure
Capital allowances cannot be claimed for expenditure on furniture, fixtures and fittings for use in dwelling houses. However, a 'wear and tear' allowance may be claimed instead, equal to 10% of 'net rents' from furnished lettings (i.e. rents less payments that would normally be borne by the tenant, such as water rates). Alternatively, a 'renewals' basis may be claimed, i.e. no relief is given for the original cost of an asset, but a deduction is given for the cost of replacing it.
- Tax on Schedule A Profits
Profits from the Schedule A business are taxable as investment income. Income from furnished holiday lettings is also taxed as a Schedule A business, although it is effectively treated as a trade for most tax purposes. Income tax on Schedule A business profits is generally collected under self-assessment. A 'non-resident landlord scheme' can apply to the UK rental income of non-resident landlords (see below).
- Rent-A-Room Relief
A tax exemption is available on gross rents of up to £4,250 a year for individuals who let furnished accommodation in their only or main residence. If the property is jointly owned, the exemption is reduced to £2,125. If gross rents exceed £4,250 a year, the landlord may choose to pay tax on gross rents less expenses (as for a normal Schedule A business), or on the excess receipts over £4,250.
- Repairs to Let Property
A deduction from Schedule A business profits may be claimed for replacing fixtures (e.g. central heating or a kitchen) with similar fixtures. However, expenditure on improved versions of those fixtures will generally be capital, and not an allowable deduction for income tax purposes. An exception is the replacement of single glazed windows with double glazed windows, as the expenditure will be regarded as allowable repairs.
- Furnished Holiday Lettings
The commercial letting of furnished holiday accommodation in the UK is treated as a trade for various tax purposes. For example, losses from furnished holiday lettings can be set against the taxpayer's other income (as for a trading loss), and is not restricted to rental profits. Alternatively, furnished holiday lettings profits count as earnings for the purposes of determining the level of pension contributions the taxpayer can make.
- Qualifying as Furnished Holiday Lettings
Property must pass certain qualifying tests for furnished holiday lettings treatment to apply. The property must be let on a commercial basis with a view to making a profit. Holiday lettings are accommodation that is:
(a) available for commercial letting to the public generally as holiday accommodation for a total period of at least 140 days in a 12 month period;
(b) let as such for at least 70 days; and
(c) not normally let to the same person for more than 31 consecutive days during a 7-month period.
- Overseas Landlords
If UK property is let by a non-resident, basic rate tax is normally deducted at source from the net property income either by letting agents or (if there is no letting agent) by the tenant, and paid over to the Inland Revenue. However, a tenant paying rent of £100 a week or less is generally not required to deduct tax. In addition, tenants and lettings agents do not have to deduct tax at source if the non-resident landlord agrees with the Revenue to complete a Self-Assessment return (although gross payment does not mean that the rental income is tax-free). Further details are contained in Revenue leaflet IR140 'Non-resident Landlords, their agents and Tenants'.
- Overseas Property Lettings
Income from property let abroad is calculated broadly in the same way as a Schedule A business in the UK (although note, for example, that the special 'furnished holiday lettings' tax rules are not applicable). Profits from overseas property lettings are taxable under Schedule D Case V.
Disclaimer
The content of these guides is based on tax legislation in operation at the time of publication, which may subsequently have changed. Whilst every care has been taken in its production, no responsibility can be accepted for any action undertaken or refrained from as a consequence of this material. This information is for general guidance only. Specific professional advice should always be obtained based on personal circumstances. TaxationWeb Limited accepts no responsibility whatsoever for any action undertaken or refrained from as a result of the information contained herein.