If you rent a residential property in the UK then you will need to pay tax on the rental income that you earn less the allowable expenses that you incur.
Below is a summary of the income and rental expenses that you can take into account.
Rental Income
Rental income is the rent you get from your tenants and can include things like additional charges for things like the use of furniture, cleaning of communal areas, and hot water and heating and repairs.
If you rent out more than one property, then the profits and losses of all of these properties are added together to arrive at one figure of profit or loss for your property business. If you have overseas properties they need to be dealt with separately as there are different rules available.
Types of property ownership
If you own your rental property with other people your share of the profits and losses are usually based on the share of the property you own unless a different allocation has been agreed. Your share of a jointly owned property is not separate from any other properties you rent which you own 100% of.
If you are married or in a civil partnership and you live together properties jointly owned will normally be taxed in equal shares If you own the property in unequal shares then the income can be taxed on that basis. You both need to declare a beneficial interest in joint property and income if you take this option.
Record keeping
You have to keep accurate records and separate your income between fully furnished lettings, unfurnished and part furnished lettings. You should keep rent books, receipts invoices and bank statements. You can also reclaim mileage (solely for this business purpose) so keep a log of this too.
Tax Relief for residential properties
Income tax relief on all residential property finance costs is restricted to the basic rate of income tax. All residential landlords with finance costs are affected and finance costs are interest on mortgages, loans (including those to buy furnishings) and overdrafts.
But what does this mean? It basically means that you work out your property income including your rental income and allowable expenses NOT including your finance costs.
This is used to calculate your income tax. At this point additional relief (i.e., a reduction) is used for 20% of the lower of finance costs on the property, property profits calculated above or adjusted total income (exceeding the personal allowance which is ALL of your income less the personal allowance). It is a little complicated but there are a few worked examples on the HMRC website) Case Studies on Tax Relief
Allowable expenses
As nearly always you can deduct expenses from your rental income as long as they are wholly and exclusively for the purposes of renting out the property. This means that if an expense was not incurred for the purpose of your property rental business, in anyway at all, then you cannot offset it.
Simple example – if you buy a vacuum cleaner for your own home but also use it to clean the rental property it cannot be used as an allowable expense. However, you could claim the cost of any cleaning products you bought specifically for cleaning the rental property.
Claiming part expenses
Sometimes you may incur a cost where part of it is wholly and exclusively for your rental property business. An example might be your rental property needs some new flooring in one room. There is a special offer on if you buy 15 square metres of flooring it is £300. Although you only need 10 square metres for the rental property as it is such a good offer you buy it. You decide to use the spare 5 square metres in your own house. In this case you can claim two thirds of the cost (or £200) as an allowable expense.
Typical expense items which are allowable
- Repairing water or gas leaks or burst pipes
- Repairing electrical faults
- Replacing broken windows, doors, gutters, roof slates etc
- Repairing internal and external walls, roofs, floors
- Repainting and redecorating (but not improving) the property to restore it to its original condition
- Treating damp or rot
- Repointing, stone cleaning
- Hiring equipment to carry out necessary repair work
- Replacing existing fixtures and fittings like radiators, boilers water tanks, bathroom suites and kitchens but not electrical or gas appliances – these fall under the replacement of domestic items relief (see below).
Replacement of Domestic Items Relief
If you buy a replacement item for your rental property then the amount you can claim against your tax is restricted.
The amount you can claim for the new replacement item is:
- The cost of the new replacement item limited to the cost of an equivalent item if it represents an improvement on the old item (i.e., if our buy a double bed to replace a single bed you can only claim up to the cost of the single bed replacement).
- The incidental costs of disposing of the old item or acquiring the replacement (so you can reclaim the cost of disposing of the single mattress) less
- Any amounts received on disposal of the old item (so if you sold the singe bed frame you would need to reduce the claim by this amount)
As always if you have any questions on the above give me a shout.
