If you own a property that you let out for someone else to live in, the income received may need to be declared on a self-assessment tax return, along with your self-employed or other income that is liable to income tax. This will be when your earnings from letting the property reach £2,500 for the year, however for lower earnings you will need to contact the self-assessment helpline on 0300 200 3310.
As with other sources of income, you can claim expenses that are incurred with the day to day maintenance and running of the property. These can include letting agent’s fees, utility bills and cleaning. Items regarded as capital expenditure, such as buying the property or renovating it beyond wear and tear maintenance cannot be claimed as expenses.
Wear and tear allowance
If the property you are letting is fully furnished you can claim a wear and tear allowance to further reduce your profits. This allowance is calculated at 10% of the net rental income, which is your total rental income, subtracting any expenses you pay that a tenant would originally pay for, such as council tax.
The alternative method is to claim the cost of replacing or repairing damaged furniture. You can use whichever method saves you the most tax. The original cost of the furniture cannot be claimed.
Furnished holiday lettings
If the property is available to rent for at least 210 days of the year, actually being rented for at least 105 days a year, with each tenant not renting for more than 31 days at a price that is comparable to other holiday lettings, you can claim additional allowances.
These allowances include being able to claim capital allowances on furniture and furnishings, including equipment used on the outside of the property and some types capital gains tax relief that businesses take advantage of.
You can also claim capital allowances on certain assets if you are letting a commercial property such as a shop or garage.
Losses while letting a property
If you make a loss when letting a property, you can carry it forward to future years to set off against any profits you make in the future from letting the property.
You cannot however, set the loss against other self-assessment income in most circumstances.
Rent a room relief
If you just let a portion of the house you are living in, such as a room in your house, you can earn up to £7,500 tax free. If you share this income with someone else the tax free amount will be halved.
Earning more than this amount will mean you have to pay tax, however you can choose how to calculate profits. You can use the normal method, bearing in mind the expenses must be proportionate to the portion of house being let. Alternatively you can take your total property letting income and just subtract the £7,500 using the answer as your profits.
Restricting financial cost relief
While normally you would claim any property letting expenses against your income to reduce profit and tax, the new rules have restricted this for financial costs. Financial costs include interest from loans and mortgages and costs incurred from these, such as early repayment charges.
The main point of the restriction is that you will only be able to claim basic rate tax relief for these expenses. This will not affect basic rate taxpayers as any reliefs will be claimed at the basic rate. Higher rate taxpayers however are affected, as before they could claim a tax relief of 40% or 45%, but now they can only claim 20% just about halving the relief available.
This change is being introduced gradually. In the 2017-2018 tax year only 25% of finance costs will have to be claimed at basic rate. For the 2018-2019 tax year it will be 50% then 75% in the 2019-2020 tax year with the change being fully implemented in the 2020-2021 tax year.
Capital gains on residential property
The recent update of the capital gains tax rates to 10% for basic rate and 20% for higher rate from the 6th of April 2016 does not affect residential properties. This means that selling a residential property will still be at a capital gains tax rate of 18% for basic rate taxpayers and 28% for higher rate taxpayers.
HM Revenue and Customs have general information for letting out a property that can be found by clicking this link.
If you would like any assistance or advice regarding the above, please do not hesitate to contact us.