27th October 2022
This article will consider the taxation of income from property on an individual when it is held by them personally and not via another vehicle such as a company. Only income tax is covered, not capital or stamp taxes.
1. Who is taxable?
Any individual who holds an income generating rental property in the UK is liable to tax on the profits. UK resident individuals are also taxable on any profits generated on property held outside the UK, subject to the relevant double taxation agreements and domicile and remittance exceptions (neither of which will be covered in this article). A non-resident individual is only taxable on their UK situs property.
2. Types of Property
There are four main types of property, each having slightly different rules when calculating the net profit subject to taxation. The four types of property are as follows:
- Residential (furnished and unfurnished)
- Furnished Holiday Lettings
All four types of property are broadly allowed to deduct the same types of expenditure, which are outlined in more detail in section three below. However commercial properties and furnished holiday lettings can claim capital allowances, whereas the others generally cannot. In addition, mortgage interest is still a deductible expense in full for commercial property and capped for higher rate taxpayers of residential properties.
The standard method for calculating rental profits is the cash basis (taxing income when received and deducting expenses as paid). It is also permissible to elect to use the accruals basis. This means that the income and expenses are calculated by reference to the amount due in relation to the tax year, rather than the amount paid in the tax year. The accruals basis is obligatory for property businesses with gross receipts in excess of £150,000.
3. Deductible & Non-Deductible Expenditure
The general rule when considering the deductibility of expenses is that they must be, a) revenue in nature and not capital; and b) are incurred wholly & exclusively in running the letting business. Common examples of tax-deductible expenditure are:
- Ground rents & service charges
- Utilities i.e water/electric/gas/council tax
- Letting agents and management fees
- Accountancy fees
- Legal fees (only if they relate to revenue expenditure; for example, action against a tenant who is being evicted for non-payment of rent)
- Mileage for travelling to and from the property (45p for the first 10,000 miles / 25p thereafter)
- Repairs and maintenance*
*Repairs are only deductible if they are revenue in nature, for example fixing a boiler or redecorating in between lettings. Replacements are deductible provided they are on a like for like basis and there is no significant improvement work. An element of improvement is deductible where it is updating the property to its nearest modern equivalent, such as replacing single glazing windows for double glazing windows.
The cost of replacing domestic items is also deductible, which includes items such as crockery, appliances, moveable furniture and furnishings.
The alternative to claiming actual expenditure incurred on the rental business is to claim the £1,000 property allowance; however, if this is claimed a deduction cannot then be taken for actual expenditure incurred. Therefore, this is only advisable when the actual tax-deductible expenditure is less than £1,000.
The rent-a-room scheme is a relief where the rent received from a lodger can be exempt from income tax. If the gross rents are less than £7,500 the income is ignored for income tax purposes. Alternatively, £7,500 can be taken as a deduction instead of claiming actual expenditure when rents are above this amount.
Furnished holiday lettings (FHL’s) must meet all the following to qualify:
- Be available for commercial let for at least 210 days in the tax year
- Let for at least 105 days, excluding period of long term let (over 31 days)
- Must not be let for long term occupation (over 155 days) to the same tenant
These rules are extended to FHL’s in the EEA.
Where more than one FHL is owned these criteria can be averaged across all properties (but keeping separate UK and EEA situs property). Some of the rules may be ‘flexed’ under extenuating circumstances.
4. Non-Resident Landlord Scheme
Where the individual is not UK resident the automatic position is for the tenant / letting agent to withhold 20% tax at source before paying the net rent to the landlord. This can be disadvantageous where the landlord is paying for expenses directly or able to claim the personal allowance, as neither of these will be taken into account. It is therefore possible to register under the non-resident landlord scheme to receive the gross rents, the agreement being that the individual files a UK self-assessment tax return to report the rental income.
The above is not exhaustive but provides a broad overview of the taxation of property income on individuals.