Inform HMRC immediately if you begin to generate an income from property and keep concise records from the outset. Heavy penalties can be imposed for failure to notify and failure to keep records.
However, from April 2017, the government has announced the introduction of a £1,000 property income allowance. Where individuals are in receipt of income below the new allowance, the income will not be subject to tax and will no longer need to be reported to HMRC.
If your property income is more than £1,000, make sure you account for all income you receive correctly, including deposits/bonds received, insurance recoveries and service charges.
If you make a loss from property activities, you are not allowed to offset those losses against your other income to reduce your tax liability. They may only be offset against other property income (but not foreign property income) or carried forward to offset against property income in future years. However, losses or parts of losses created by claiming capital allowances may be offset against other income. The option to offset losses from furnished holiday lettings against other income has been removed from April 2011.
If you take in a lodger, you can make use of the 'rent-a-room' relief which means if your takings are less than £7,500 (2018/19) you pay no tax on that income. The exempt amount is halved if you let the room jointly.
Expenses incurred in the seven years prior to commencement of a property business can be included within your income calculations. However, the rules surrounding this are more complex than they first appear and eligibility to include them will depend on many other factors.
Be sure you know the difference between 'capital' expenditure and 'revenue' expenditure. Capital expenditure cannot be deducted from your rental profits; it can only be deducted from any gain you make when you dispose of a property. Capital expenditure includes:
- The actual cost of the property itself and stamp duty land tax
- Legal and professional fees associated with the acquisition or disposal
- Costs of refurbishing a property bought in a run down state, including all improvements
- The addition of anything that didn't exist before, no matter how small eg fitting a fan or wall unit
HMRC are particularly interested in ensuring that taxpayers do not claim capital expenditure as revenue expenditure as this is a very common error that is frequently made, particularly when a property is made available to let for the first time.
Where a property is not initially in a fit state of repair to rent out for the first time, all the costs associated with improving its condition are classed as capital expenditure, and this includes any re-decorating after the work has been carried out. However, if a property only requires cosmetic repairs and re-decorating, this expenditure will be an allowable deduction from your profits when letting commences.
If possible, rent out a newly acquired property for a period of time before carrying out any renovations. This can help avoid any routine repairs being disallowed as capital expenditure by HMRC.
Try to avoid mixing repairs with improvements at the same time, and get separate quotes for the different types of work, otherwise you risk the whole cost of renovations being disallowed as capital expenditure by HMRC.
Make sure you deduct all expenses that are wholly and exclusively for the purposes of the property business. Even if you pay the expense privately, provided you incurred the cost and can demonstrate this from a receipt or statement of some kind, you can deduct the expense from your profits.
Travel expenses incurred wholly and exclusively for the purposes of the property business can be claimed. However, if you rent out your property through a management company, your ability to claim travel expenses will be more limited; you will only be able to claim travel expenses for exceptional purposes which are far beyond the remit of the letting agent.
You can employ your children (if aged 13 or over) in your property business and therefore save your business tax. However, they must actually carry out work in the business (eg gardening or maintenance) and be paid a realistic rate for doing so.
Make sure you apportion costs where there is an element of private use of a property or allowable expense. This is a very common error made by property owners and easily picked up by a tax inspector.
Interest on borrowings
Provided any interest on borrowings is 'wholly and exclusively' for the property business, it doesn't matter where the finance originates from. The loan may be on the property itself in the form of a mortgage or may be from other sources. The important point is that the borrowings must have been for the purposes of financing the property business. For example, interest on a mortgage which was to finance your ordinary private residence will not be allowable.
It is common for a landlord to release equity from a rental property by re-mortgaging and to use those funds for other purposes. However, in order to claim tax relief for all of the interest incurred on a loan, you may only withdraw capital up to the original amount first introduced when the letting commenced.
However, from April 2017 there is a restriction on tax relief for finance costs. The tax relief will be restricted to basic rate tax relief only and is being phased in gradually from April 2017.
Allowances for capital expenditure
Capital allowances are available for plant or machinery used or provided for use, for the purposes of running a property rental business. Examples may include tools used for maintenance and office equipment.
For residential properties, you cannot claim allowances for the initial cost of buying furniture, white goods, fixtures and fittings, but you can claim for the cost of any genuine routine repairs or replacements. The previous 10% 'wear and tear' allowance towards the replacement costs of moveable items such as furniture and appliances has been abolished from April 2016.
Furnished holiday lettings have different rules whereby capital allowances can be claimed for the purchase cost of furniture, white goods, fittings and fixtures. You should ask your solicitor to obtain a full list of furnishings and fittings and ensure that a proportion of the purchase price is allocated to these items to help demonstrate to HMRC that the correct allowances have been claimed when the time arises. To claim capital allowances for the fixtures, a survey may need to be conducted to calculate the value of eligible expenditure and a report submitted to HMRC with your tax return which we can help you with.
Capital Gains Tax (CGT)
By living in a property at some point during your period of ownership, you can reduce your CGT liability when you dispose of a property that has been part of a property rentals business. However, you must elect for the property to be your main residence and actually live there. HMRC will need to see evidence of this such as utility bills in your name or a record on an electoral register.
Under the 'lettings relief' rules, exemption from CGT is given to provide relief for any gain arising while a property is let which is actually your main residence (up to a certain limit). Provided you have lived in a property at some point, relief may be given related to the period of time during which the property (or part of it) was rented out.
From April 2014, the last 18 months of ownership of a property are exempt from CGT provided you have lived in the property at some point (prior to this it was 3 years).
If you rent out furnished holiday lettings or are classed as a trader, you may qualify for entrepreneurs' relief and other reliefs such as roll-over relief and gift relief.
Please read the following pages to read more about CGT: Capital gains tax
This information is not meant as a substitute for professional advice and by no means covers every scenario. Almost every rule described here will be subject to many exceptions and caveats. Tax legislation is extremely complex and can be difficult to understand. You should discuss your circumstances with a qualified professional before acting on any information contained within this website. Tax legislation is constantly changing and the information contained within this website is written from our current understanding and interpretation of the tax system as of 6 April 2018.