Renting out a property
This is an area of personal tax in which Taxmates specialises. We are retained by a number of lettings agents to look after the tax affairs of their landlords and we have many clients for whom we complete self-assessment tax returns to ensure that their rental income is properly recorded with the tax authorities. There are special and complex rules regarding rental taxation. We are experts at getting the best out of claimable expenses and arriving at the best tax situation. Our fees are tax deductible (so you effectively get a discount). Doing it yourself could end up costing you more than paying us!
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, with a period of rapidly dropping house prices in recent years. 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 still 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 has not been automatically issued to you). If no return is received, you must advise the Inland Revenue of the existence of a potential income tax liability by 5 October following the tax year end. You should then receive a tax return and pay any tax due 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. Taxmates will help you to make sure you pay only the minimum amount of tax.
Expenses deductible against rental income (General Information)
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
- water charges
- ground rent and service charges
- insurance premium for property and contents
- agent's charges
- inventory costs
- maintenance and repairs
- wear and tear allowance where let furnished (currently 10% of rents)
- advertising for tenants
- gardening and cleaning
- accountancy fee (yes!..... if we 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
- Security and alarm systems
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 £4,250 of rent which you receive each year will be tax free.
Furnished Holiday Letting
This type of letting, unlike ordinary property letting, is treated as a trading business, 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 are additional capital gains tax reliefs on a sale of a property which qualifies for furnished holiday lettings treatment. These reliefs include taper relief for a business asset and roll-over relief (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.
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.
Your last three years of ownership of the property are also in any event exempt. In addition, there is an extra CGT property relief where you have at any time occupied the property as your main residence, and this relief can be worth up to £40,000.
Ask Taxmates before selling an investment property as timing can be important in reducing your tax bill.
Jointly Held Property – Some Technical Notes
Where a property is rented out, any rental income (less certain deductible expenses) is subject to income tax on the part of the owner of the property. For this purpose, it is the beneficial (not legal) owner(s) who are so liable.
Normally, the legal owner(s) will also be the beneficial owner(s), but this is not always the case. In addition, any capital gain arising on sale will be subject to capital gains tax (CGT) on the whole gain; however, if the property has been lived in as the individual’s sole or main residence and also let out during ownership, part of any capital gain will be exempt from CGT and part will be subject to CGT (although lettings relief is also likely to reduce the taxable part of the gain, possibly to nil).
Where a property is, or could be, owned by two or more individuals (e.g. a married couple, co-habitees, brother and sister, etc.) mitigation of the above income tax and CGT charges may be achieved by careful splitting of the rental income and the gains. But how can this be achieved? The answer depends upon if the co-ownership of the property is between husband/wife or non-marrieds.
Where the couple is married, if the legal ownership of the property is in the name of both spouses, then for income tax purposes any rental income is automatically split 50:50 irrespective of the underlying beneficial ownership percentages. Thus, for example, where the beneficial ownership is split (say) 60:40, 70:30 or 80:20, the rental income is still split 50:50 but on sale any capital gain is split according to these ownership percentages, i.e. 60:40, 70:30 or 80:20 in the above examples.
Legal and beneficial ownership are two different things. Legal ownership is effectively the paper title to the property and will be shown at the Land Registry; beneficial ownership refers to the right of enjoyment of the property (i.e. the right to live in it, or to let it out and receive rental income) and is relevant for tax purposes. The beneficial ownership split is often, but not always, also shown at the Land Registry.
Thus, when Mr and Mrs Smith buy a property to let out, they may each be shown on the legal title and may also each have a beneficial interest in the property. Where in such cases Mr Smith is a higher or additional rate taxpayer but Mrs Smith is a basic rate or nil taxpayer, it may be a good idea for Mrs Smith to receive all or the bulk of any rental income to lower the overall income tax charge thereon. This means that it becomes necessary to override the automatic 50:50 income split mentioned above. To do this requires that Form 17 (‘Declaration of beneficial interests in joint property income’) be filed with HMRC.
Form 17 allows a married couple to determine how the rental income is to be split; however, any split of such income must be in line with the underlying beneficial ownership percentages.
Example – Legal v beneficial ownership
Mr and Mrs Smith purchase a property and agree that rental income should be split 5:95 in favour of Mrs Smith; this then requires that beneficial ownership must also be split 5:95.
On sale, without further changes, Mr Smith is subject to CGT on 5% of the gain and Mrs Smith is subject to CGT on 95% of the gain.
What is not possible is to have a rental income split, say, 70:30 but a beneficial ownership split, say, 80:20 (i.e. a different split).
Having completed Form 17, it must be lodged with HMRC within 60 days of its completion to be valid. It must be signed by both husband and wife, one signature being insufficient. It is now also necessary to attach evidence of the beneficial ownership split. Any subsequent change of circumstances subsequent to lodging Form 17 must be immediately notified to HMRC.
However, it is important to note that Form 17 is irrelevant where the legal ownership is in the name of one spouse only. In such cases, the automatic 50:50 split does not apply and any beneficial ownership split does not need to be in line with the rental income split. Form 17 is also irrelevant where the co-ownership of the property is by any two or more persons who are not married (e.g. brother sister, co-habitees).
The lodgement of Form 17 by a married couple implicitly means that the beneficial ownership of the property is that of ‘tenants in common’ (not ‘joint tenancy’). This has the consequence that, on the death of one spouse, the other spouse does not automatically inherit the deceased’s spouse’s share of the property, in which case a will needs to be drawn up by each spouse to deal with their share of the property.
To avoid the need to file Form 17 a married couple should not be joint legal owners. However, where legal title is held by both spouses, Form 17 need only be filed where rental income is to be split other than 50:50.