Almost five million households rent their own homes in this country, of which 2.2 million rent from private sector landlords. With steeply rising house prices in the UK, an increasing number of people are choosing to rent their own homes, and put off a move into owner-occupation until later years.

If you’re thinking of letting a residential property, or business premises, here is an overview on how rental properties can be owned and what the tax implications could be.

Residential properties include:

  • Self-Contained Residential lets
  • Houses
  • Flats
  • Maisonettes
  • Holiday Cottages

Commercial/Business Properties include:

  • Shops
  • Offices
  • Workshops and workspace
  • Warehouses and storage space
  • Factories and Industrial uses
  • Leisure premises including pubs & clubs
  • Garages

Individual owners of let property are normally taxed on the annual profits they make from letting their property whereas a typical property-income business will hold the properties for the medium to long term and cover all the expenses with the rents received.  If landlords hold properties for a shorter period with a view to creating a profit on sale after development or refurbishment, they may have their property business taxed as a trading income, rather than as property income.

Income rules for property income are treated very differently from trading income:

Annual profits made by the property income business are not subject to National Insurance.

Any profit made on the disposal of property is taxed as a capital gain allowing the possibility of the annual capital gains tax exemption to be deducted, and possibly a lower rate of tax applied.

A property letting business does not have to be VAT registered unless it is a holiday lettings business.

The disadvantages to the property income rules compared with trading income:

  • Expenditure connected with legal expenses re: sales or purchases of property are not deductible.
  • Losses cannot be set against other sources of income.
  • Entrepreneurs Relief is not normally available to the sales of residential property.
  • Inheritance Tax on death may be chargeable on the value of properties.

Property income is calculated as rents receivable, less the expenses set against those rents for tax purposes.  It includes the income from all properties let by the same person in the UK.

Property income does not include profit made from selling the property nor are costs connected with capital expenditure on buying or improving the property allowable expenses against rental income.

A property business starts as soon as the property is acquired and is available for letting.

Any pre-letting expenses can be deducted from the rents received in the first year.  The sort of expenditure allowable can include the following:

  • Legal fees for drawing up tenancy agreements.
  • Letting or managing agent’s fees.
  • Advertising for tenants.
  • Accountancy fees for drawing up property accounts.
  • Ground rent and service charge for leased property.
  • Gardening and cleaning where relevant.
  • Motor expenses for travelling to the property.
  • Wear and tear or renewals allowance.
  • Building and contents insurance without maintenance and repairs.
  • Water rates and council tax.
  • Interest paid on borrowings to fund the property purchase.
  • Lighting and heating costs.

The person or persons who own the property are taxed on the property income in relation to the proportion of the property they own.  For married couples, generally property income is held 50/50 and this will apply unless a declaration has been made jointly by both partners which show the actual proportion of beneficial interest in the property.  Once the declaration is made it cannot be changed unless the underlying beneficial interest in the property changes.

Tax on property income is payable under self assessment for individuals and trustees.  Landlords in their first year, may have to pay 150% of the annual tax (due on 31 January following the tax year in which the letting business has commenced) because in that year they will include 50% of the tax due in the previous year as a payment on account.

Where the let properties are held by a company, the corporation tax due on the company’s total profits is normally due 9 months and 1 day after its accounting year end.

Where an improvement is made to a property, this will not be deductible against rental income and will only receive tax relief when the property is sold.

A furnished property is defined as one which is capable of normal occupation without the tenant having to provide their own bed, tables, sofa, cooker, and other furnishings etc.  HMRC considers a property as furnished when it is fully furnished as opposed to partly furnished. A partly furnished property would normally include only white goods such as the cooker, freezer and washing machine.

It is key to establish whether a property is furnished or not, since the landlord can claim against furnished lettings for the ‘renewal basis’ for the cost of replacing an asset or a ‘wear and tear’ allowance which is calculated as 10% of the net rents from that property.  In this regard the net rents are calculated as the rental income received, less any expenses paid by the landlord which a tenant would normally bear, such as water rates, heating bills or council tax.

The wear and tear allowance needs to be calculated on a property by property basis since it only applies to furnished properties.  The wear and tear allowance covers items such as furniture, furnishings, electrical goods, white goods, crockery, linen etc.

As an alternative to the wear and tear allowance, the landlord can claim the renewal basis for replacing furniture and fittings but not the original cost of the items.

Ways in which a property can be held.

Landlords can own properties as joint-tenants where the owners hold an equal undivided interest in the whole property.

Tenants in common where the individuals hold separate and identifiable shares, for example, 30% and 70% of the property.  Where the property is held jointly, this can be held as a partnership or a limited liability partnership to manage that property letting business.

If the intention is to let 2 or more properties, it maybe worthwhile holding the properties through a limited company.


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