Taxation on Rental Income
I phoned my Tax office for some advice last week imagine my surprise when the telephone was answered “Stand and Deliver”!! Actually I just made that bit up. To be honest despite being close to the deadline, the telephone queue was short and the lady at the other end was friendly and helpful.
Letting residential investment property is treated as running a business, so you will of course have to inform the HM Revenue & Customs of your circumstances and fill out an appropriate tax return, declare your income from property and pay the taxes due.
There are plenty of things you can do to reduce the tax liability however which are completely legitimate.
For the purposes of this article I have ignored holiday lets and 'rent a room' scheme as these have slightly different rules. For Landlords who reside abroad there is a special system with special rules for paying tax. This may be covered in a future article.
Despite my annual trepidation about completing a tax return and the last minute frenzy of activity to get it done on time (my apologies to anyone around me at the time), the whole process is actually pretty easy. Since the introduction of online filing, the process has got even easier, and I highly recommend that anyone who has to complete a tax return takes advantage of the online system. It even does the calculations for you!
Completing the land & property section is relatively straightforward with only a few boxes to fill in. Income is generally just the rent, but can include other items such as a service charge. What you really need to know is - what can be claimed against income to reduce the profit and minimise the tax bill?
Allowable expenses include any costs of letting or managing your property such as:-
- professional fees (letting agent, accountant & legal fees)
- insurance (buildings, contents, Rent & Legal)
- mortgage interest (though not any repayment part)
- maintenance and repairs
- bills (gas, water, electric, council tax, ground rent, service charge)
- advertising & promotion
- Wear & tear allowance - 10% of total rent on furnished properties only
- other direct costs such as phone calls & travelling
Unfortunately there are some restrictions:-
Improvements may not be allowed against rental income. A new kitchen for example would be classed as an improvement and therefore considered to be a “capital item” - essentially allowed to reduce the eventual profit (capital gain) when selling the property instead of reducing the profit of rental income.
Replacement costs of furniture, furnishings and machinery are not allowed if you are already claiming the 10% wear & tear allowance. Sorry it’s one or the other, you can’t do both.
Capital Allowances – whilst you can legitimately claim for the cost of things required to run your business (tools & equipment for example) the rules are a little more complicated. Normally you can claim 50% when you buy it, or even 100% for items classed as “environmentally friendly”. The rates sometimes get changed, so best to check with the revenue each year.
Allowances for plant and machinery also cover items such as cars, vans, ladders, computers etc. So if you do buy something that is used for the business then make sure you claim for it. Please note however, that gleaming new Harley Davidson in your garage is unlikely to be allowed even if you class it as the “Emergency Overland Response Vehicle”!
For most landlords, the system is pretty straightforward with simple calculations and no surprises. The more complex the business, the more factors come into play, but also the more that can be claimed against income to reduce the tax bill.
Since I don’t claim to be a tax expert, the above article is written as a general guide. As always personal circumstances may require different advice, so seek professional advice from a specialist tax adviser as required.
21st January 2013
Source: HM Customs & Excise website and publications. Click here to link to their website.
Martin Adshead has been a successful portfolio landlord for over fifteen years. REB Letting was established as a Letting Agent in June 2002. Martin holds an advanced qualification – Certificate in Residential Letting and Property Management – and is a Member of the Association of Residential Letting Agents (MARLA). Outside of work he enjoys Scuba Diving (Instructor Trainer) motorcycling, skiing and sailing.