Uk Landlords - Handling Income Tax Issues

Posted on October 9th, 2008 | by John Glenn |

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It’s only a small word but it emerges bigger in the thoughts and the nightmares of many of us. It was Disraeli who said that there are only two things in life that are certain that are death and taxes. It always helps if you have a good accountant to guide you in terms of paying taxes.

I confess it is too late that I have become aware with the workings of the taxation system. For years I managed without making a return because I knew I was not making any money. My mortgage payments were hardly covered by the rental income and having not sold any property, there were no capital gains.
My Tax Liabilities

Tax liabilities for rental properties are charged on the basis of income and capital gains. Firstly, let’s examine how liabilities derived from income are calculated.

All income from land and property in the UK is taxed under Schedule A; that includes residential investments whether they are furnished or not. Income and expenses for tax purposes are assessed as a single letting business.

In essence, your taxable profit is calculated by taking your annual rent and then deducting expenses. For convenience HMRC separate expenses into 5 categories. These are:

• Legal & professional- Legal services for a remortgage, valuation fees, mortgage broker fees, landlord safety certificate costs, tenancy agreement costs, letting agent fees, admin cost to close a mortgage, membership fees to a professional body.

• Repair, maintenance and renewals-redecoration costs, appliance repair charges, plumbing, electrical repairs, etc

• Rent, rates, insurance, ground rents, etc.

• Cost of services provided, including wages – cleaning, meals

• Other expenses like telecom charges, utility bill costs, computer software, advertising costs etc.

What are my allowable expenses?

Repair and renewals

Where a property is furnished or part furnished; rather than to claim as each renewal crop up it is possible to make a single claim of 10% of rent as a ‘wear and tear’ allowance.

Loans and Interest
Most people must have procured money to finance their investment. When accounting for these costs it is interest payments alone that are an allowable expense. This means where a loan is a repayment mortgage; only the interest element of the loan can be offset against rental income.

Non – standard lettings
There are two categories of residential rentals that are treated slightly differently by the Revenue. These are where somebody rents a room in their house and a furnished holiday let.

Rent a room
Under this system a person is allowed to rent out a room in their own home without having to pay tax providing the rent is no more than £4250 pa.

Furnished holiday lettings
These are slightly different to the Revenue from a standard residential let, as it the amount of management time involves short rental periods.

To qualify as a holiday let the following criteria must be met. The property must be:

• Accessible for holiday let at least 140 days a year

• Actually let for 70 days a year

• Not occupied by the same person for over 31 days in 7 months