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Tax on Rental Income

Let Property

Many people, particularly over the last 10 years, have purchased a "buy to let" property with a view to generating additional income or an eventual capital gain. The family home can also generate income through letting of the whole property (e.g. while abroad) or a self-contained annexe, or by taking in a lodger. A holiday home may also be let.

The ownership of property to be let will result in various tax issues. It is necessary to keep tax records of all purchases and receipts relating to rental property for at least 5 years and 10 months after the end of the tax year, as well as a good inventory detailing any improvements made to the property.

Income Tax

A UK property is subject to UK income tax on its net income regardless of whether the landlord is resident in the country.

Such income is usually charged to tax as investment income and must be declared on the land and property pages of the self-assessment tax return form. Income tax on rents is paid as part of the half-yearly payments due on 31 January and 31 July each year. Alternatively it may be collected through an employee's PAYE tax code.

Special rules apply to "furnished holiday lettings", which may be treated as trading income with possible advantages regarding pension contributions and eventual capital gains.

Income from a lodger is tax free up to £4,250 for the 2006/07 year, provided it comes within the "rent a room" provisions - which include the room being furnished and the homeowner living on the same premises for at least part of the letting period. Tax is payable on any excess over £4,250, or alternatively the homeowner can choose to pay tax on gross rents less actual expenses (the normal letting income rules).

Deductible Expenses

Expenses incurred "wholly and exclusively" for the letting or managing of the property can be offset against the gross letting income.

Common expenses are:

  • letting agents', accountancy and legal fees
  • buildings and contents insurance
  • loan interest
  • maintenance and repairs (excluding improvements)
  • utilities paid by the landlord (e.g. gas, water, electricity)
  • ground rent and service charges
  • council tax paid by landlord

Any excess of expenses over income will produce a loss that can be carried forward against subsequent profits. It is also possible to relieve a loss against other lettings profits in the same year. Unfortunately, losses cannot be set against other types of income such as salary.

Non-UK Resident Landlords

There are special taxation provisions concerning landlords that own properties in the UK but spend at least six months of the year abroad. Although they may not normally pay tax in the UK, they have to pay basic rate tax on the net rental income of UK property. However, personal allowances may be available which cover the net rental income and entail that no tax is payable.

Non-UK resident landlords can apply to the Inland Revenue to receive gross income from rental property. Any tax due is then assessed via the self assessment system.

Capital Gains Tax

If a profit is made on the ultimate sale of a let property a 40% Capital Gain will arise. This does not apply to the sale of your own home. Principal private residence relief is generally unaffected by income received from lodgers. Various reliefs are available that may reduce any gain (e.g. taper relief, which is more generous the longer the property is held).

Please note: This guide is intended to provide basic information only. Where specific advice is required, we recommend that you seek proper professional help; either from Just Tax or other suitably qualified person or practice.

The tax information here is reproduced by kind permission of Just Tax.

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