Income and business expenses from property

There have been changes made in recent budgets which affect landlords of buy to let properties and If you have a second property, or a portfolio of properties, in the UK or abroad that you let out, you need to consider these, as they will affect the rental income profit you will need to report on the property pages of your self-assessment return.  There may be some tax to pay on any profits made. Letting out a property should not be confused with Renting Out a Room in your main residence.

You need to let HMRC know of any new sources of income, such as rental income, by 5 October of the tax year. You will then be sent supplementary pages to be completed and sent in with your Self-Assessment Tax Return.

You should keep a record of all rents received in the relevant tax-year, and of any outgoings or expenses incurred in the letting of the property/properties.

If the property is owned jointly then the income you receive will be apportioned equally between the numbers of joint owners.

The kind of expenses you can claim

Mortgage interest restriction –from 6th April 2017

You may have a mortgage or a loan to purchase the property or several if you have more than one. You should retain the annual certificate of interest paid on each loan. The lender will supply this, as tax relief is provided on the mortgage interest paid to purchase the property. However, from 6th April 2017, there was a restriction on the deduction of finance costs from a ‘dwelling related loan’ on let residential properties. This does not apply to companies with residential letting businesses. 

The restriction on deductibility of interest (and the related tax reducer) will be phased in over four years, with the first year that was affected being 2017/18 and will be gradually fully disallowed by 2020/21. Therefore, for 2019/20 25% (2018/19 : 50%) of the mortgage interest will be relieved against rental income profits with tax relief provided at the basic rate x of 75% (2018/19: 50%) of the mortgage interest received.  

Other expenses which can be deducted against rental income

You can also claim for water rates, council tax and any insurance that you pay on the property.

Before you receive rental income from a tenant, you can claim for any advertising costs and for any gas and electricity charges payable while the property is empty, providing it has been available for letting. You can also claim for any legal fees incurred in obtaining leases and for any fees paid to a managing agent.

If you need to do any incidental repairs such as broken locks or windows you can usually claim relief for these, but not for any repairs of a capital nature such as improvements. These will generally be added into the calculation of any potential Capital Gains Tax when the property is eventually sold. If you sell the property you may be liable for Capital Gains Tax. If you decide to move into the property you may have to make an election to determine your main residence to avoid a Capital Gains Tax charge.

If the preparation of your rental income account is lengthy you may be able to claim a nominal amount for accountancy fees incurred in arriving at the net taxable amount.

From April 2016, the wear and tear allowance ended, to be replaced by a deduction for landlords when they actually spend their money.

This relief applies to landlords of unfurnished, part furnished and furnished properties (but not furnished holiday lettings and letting of commercial properties).

The replacement furniture relief will only apply to the replacement of furnishings- the initial cost would not be included.

Therefore, the capital cost would include the replacement of furniture, furnishings, appliances and kitchenware provided for the tenant’s use in the dwelling house, such as:

  • Televisions,
  • Fridges and freezers,
  • Moveable furniture or furnishings, such as beds or suites,
  • Carpets and floor coverings,
  • Curtains,
  • Linen,
  • Crockery and cutlery.

Integral features that would not normally be removed by the owner, such as kitchen units and washbasins, would not be included in replacement cost – as now, they are  considered to be a repair to the property itself.

Stamp Duty Land Tax Increase on Buy to Let

From April 2016, the stamp duty land tax will be 3% higher than the standard SDLT rates on purchases of additional residential properties with a starting band of £40,000 rather than £125,000. This additional charge will apply to buy to let properties and second homes.

How the tax due is paid

 HMRC may amend your tax coding to include a restriction for the rental income that means any tax due can be collected via your PAYE tax. You can request that this restriction is removed and pay the tax annually as above by contacting HMRC to advise that any tax will be paid annually by self-assessment.

The Rent a Room Scheme

The Rent a Room scheme is an optional exemption scheme that lets you receive up to £7,500 of tax-free income in 2018/19 (£7,500: 2015/16) from renting furnished accommodation in your only or main home.

You can choose to take advantage of the scheme if you let furnished accommodation in your only or family home to a lodger. (Your only or family home is the one where you and your family live for most of the time).

A lodger is someone who pays to live in your home, sometimes with meals provided, and who often shares the family rooms.

A lodger can occupy a single room or an entire floor of your home. The scheme does not apply if your home is converted into separate flats that you rent out. In this case you will 

need to declare your rental income to HMRC and pay tax in the normal way. Nor does the scheme apply if you let unfurnished accommodation in your home.

You can remain in the scheme even if your income exceeds £7,500. You simply pay tax on the difference, for example, a rental income of £8,000, less your £7,500 allowance results in taxable income of £500. If the property is held jointly then the tax exemption allowance is split between the property owners. You cannot claim expenses against the excess income.

If you charge for additional services such as meals, laundry or telephone costs, you will need to add the payments you receive to the rent, to work out the total receipts.

If you're a mortgage payer it's best to check whether taking in a lodger is within your mortgage lenders and insurer's terms and conditions. Even if you do not own your home, you can choose to take advantage of the Rent a Room scheme, however, if you are renting you should check whether your lease allows you to take in a lodger.

You cannot usually claim 'Rent a Room' relief when you go abroad and let your home in your absence, or where you occupy job-related accommodation and let your former home.

Alternatives to the Scheme

To work out whether you will be better off joining the scheme, or declaring all of your letting income and claiming expenses on your tax return, you need to compare the following:

  • How much income you are left with after your expenses.
  • The amount of your receipts (rent plus any income from laundry services, meals etc.) over £7,500 in 2019/20.

If you opt out of the scheme you will pay income tax on the first amount. If you opt into the scheme you will pay tax on the second amount. You need to work out what method is best for you. The principal point to bear in mind is that if you are in the Rent a Room scheme you cannot claim any expenses relating to the letting (for example, insurance, repairs, heating and lighting). You do however, have the option to opt out of the scheme and therefore you will be taxed on income, less expenses. You can also elect to opt out of the scheme for a particular year, if for example, the individual made an allowable loss.

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