Income from Property
What are allowable expenses for property rental:
- Letting agents’ fees
- Legal fees for lets of a year or less, or for renewing a lease for less than 50 years
- Accountants’ fees
- Replacement of domestic items
- Buildings and contents insurance
- Maintenance and repairs to the property (but not improvements)
- Utility bills, like gas, water, and electricity
- Council Tax
- Services the taxpayer pays for, like cleaning or gardening
- Other direct costs of letting the property, like phone calls, stationery, and advertising
Expenditures in capital nature are not allowed
- Acquisition of new buildings
- Enhancement expenditure on an existing asset such as a new extension
- Depreciation of existing capital assets
- Legal or other costs associated with an item of capital expenditure
- Cost of renovations or repairs incurred before the property is let for the first time
Treatment of Finance Costs
Until April 2017 landlords were able to claim any finance costs (including interest on mortgages relating to the property) as an allowable expense. By the end of tax year 2020/2021 the reduction will be in the basic tax rate. (for more information please contact our office).
This change has no effect on:
- A UK Resident Company
- A Non-UK resident Company
- A landlord of furnished holiday lets
Replacement Domestic Item Relief
Where a landlord rents out furnished property, they will incur expenses in maintaining the items within the property. Furniture and appliances will become broken, worn, out-dated or even stolen over time, and will therefore need to be replaced.
Replacement Domestic Item Relief allows landlords to claim a deduction for the cost of replacing domestic items such as:
- Movable furniture (beds, free-standing wardrobes)
- Furnishing (curtains, linens, carpets, floor coverings)
- Household appliances (televisions, fridges, freezers)
- Kitchenware (crockery, cutlery)
New items the landlord purchases for the property must be solely for the use of the tenants, and any items that have been replaced must be removed.
- The Landlord cannot claim the initial cost of providing domestic items as an expense.
- The new item cannot be an improvement, the deduction is limited to the cost of an equivalent replacement.
- The relief is not available if “rent a room” relief applies
- The relief is not available on Furnished Holiday Lets
The loss is carried forward to future tax years, where it is used to reduce future profits. However, it can only be used to reduce future property income – it cannot be offset against, for example, income from employment or self-employment.
If there is insufficient property income in the following tax year to utilise all the loss, then the profit is reduced to NIL in that year and the balance carried forward once more. The loss continues to be carried forward until there is sufficient property income to be offset against.
NOTE: Losses on holiday lets must be kept separate, as they can only be utilised against profits from the same or other holiday lets in subsequent years.
Property Allowance – for small amounts of rental income
From 6th April 2017, a taxpayer who has less than £1000 income from property (including any foreign property) is exempt from tax on this amount and doesn’t need to complete a tax return in respect of it.
If a taxpayer claims the property income allowance, they cannot deduct any allowable expenses or claim any other allowance. Regardless of whether the taxpayer has one, or more than one property business, the total amount of property income allowance claimed cannot exceed £1000.00
The property income allowance cannot be used if the taxpayer also claims Rent A Room relief.
A taxpayer in these circumstances can, however, still choose to fill in the UK property pages if they wish. This could be because they choose not to claim the allowance as their allowable expenses are higher than the turnover and they want to be able to claim relief for the loss against future property income.
Where the taxpayer has property income above £1000, they can either claim the £1000 allowance (in which case they cannot deduct any expenses), or can choose to forego the £1000 allowance in order to deduct their allowable expenses. The taxpayer should choose whichever approach is most beneficial to them.
Rent a Room Relief
Taxpayers who let out part of their own property (where they themselves also live) are eligible to claim a special “relief” called Rent A Room Relief. This relief is available regardless of whether the taxpayer owns the property, or whether they rent it form a landlord.
Under Rent a Room Relief, up to £7500 of gross rental income (before deduction of expenses) can be earned tax free. This could be from renting out one room, or several rooms. The £7500 allowance is split if the letting is carried out by married couple or a civil partnership, each person would be entitled to £3750 per annum.
Rent a Room Relief is also available to taxpayers running a guest house or B&B (as long as they live at the property themselves).
A furnished holiday let is one which meets the following criteria:
- A commercial operation run with a view to make a profit
- Must be available for public letting for at least 210 days a year
- Must actual be let for at lease 105 days a year
- Must not normally be let to the same person for a continuous period of longer than 31 days
If the property qualifies as a furnished holiday let the following rules will then apply:
- If they are part of the taxpayer’s own home, furnished holidays lets will quality for Rent A Room relief if the taxpayer wishes to claim it.
- Mortgage interest can be claimed as an allowable expense – but not for any element relating to a private part of the building
- The taxpayer cannot claim domestic item relief when replacing items within the business
- The taxpayer can claim capital allowances on items such as furniture or other equipment.
- Income from furnished holiday lets can be used to increase the amount an individual is permitted to contribute to their personal pension.