The letting of property in the UK is treated for income tax purposes in the same way as a UK property business. Where more than one property is rented out, the letting of all the properties is treated as a single business, which allows a loss made on one property in a year to be effectively set against profits made on others. No distinction is made for these purposes between property let unfurnished and furnished, except for the special rules which apply to furnished holiday lettings (see next section).
Accounts should be prepared for the business in accordance with generally accepted accounting principles, although in most cases this should simply mean making sure that all rental receipts have been recorded and only expenditure of a revenue nature has been deducted in arriving at profits.
Rents should be included on the basis of the sum actually due for the tax year. This means that any rent paid in advance that relates to a period after the end of the tax year should be brought into account not when it is received but in the following tax year. If you exclude such a receipt in year 1 make sure you remember to pick it up when you prepare your figures for year 2.
You can claim expenses which are revenue in nature. Capital items cannot be claimed directly against income although some other relief may be available. You must also show that the expense is incurred ‘wholly and exclusively’ for the purpose of the letting business so expenses which have a personal element to them must usually be apportioned.
Typical expenses that can be claimed will include:
There may be a particular issue in dealing with expenditure on the fabric of the property. A repair can be deducted from income but where there is a clear element of improvement that takes the property beyond its original condition, then the repair will be regarded as capital and cannot be claimed against income.
Common items of repair that can usually be claimed will include:
Where expenditure is clearly of a capital nature and results in an improvement to the property it may be possible to claim the cost of it in calculating the capital gain when the property is sold. Improvement expenditure is deductible against the gain, provided it is still reflected in the state of the property at the time of disposal.
The capital allowance rules that give some deduction for plant and machinery do not apply to the rental of residential property.
Where a property is let on a furnished basis there is an optional allowance towards the cost of furniture. HM Revenue & Customs (HMRC) allow by concession a deduction of 10% of the net rents to cover the wear and tear on furnishings such as carpets, beds, settees etc. There is no requirement to demonstrate actual expenditure on the replacement of these items.
As an alternative, where the property is let furnished the landlord can claim a renewals allowance when furniture and fixtures such as baths etc are replaced. The allowance cannot cover the original cost of the item, nor can it include any improvement element in the replacement. This latter relief is also available on fixtures where a property is let unfurnished.
When the property is sold there may be a liability to capital gains tax (CGT) on the disposal. The gain is calculated by deducting from the sale proceeds:
Any gain will then be reduced by what is known as taper relief. Residential property (except furnished holiday lettings) will qualify for non-business taper relief, which is calculated by reference to the number of complete years of ownership since the date of purchase or 6 April 1998 whichever is the later. A bonus year is added where the property was owned at 17 March 1998. The maximum rate of taper relief is 40% reached after 10 years (including the bonus year).
Where the property that is being sold has also qualified at some time during the ownership of the vendor as their only or main residence, some exemption may be available against the gain and a further letting relief of up to £40,000 may be claimable.