Property Lettings

Contractors		Documents
IR35		Lettings
Outsourcing		Remittances
Residence		Start Ups
VAT Pitfalls		Wills

The way in which letting income is taxed has changed significantly since April 1995. Letting property is now treated as a business and the profits are calculated by using ordinary accounting principles, including an accruals basis where appropriate.

1. Computation of taxable income

Income from all properties are pooled together, regardless of the type of lease and whether the property is furnished or unfurnished. Expenses for all properties are pooled and deducted. Although property letting is taxed as a business, the income is investment income not trading income, and tax is charged under Schedule A on the net profits. The income does not count as 'net relevant income' for making pension contributions, and relief for losses is more restricted than for traders. National Insurance contributions are not payable.

2. Income

All income from land must be included in the Schedule A accounts. This includes rents, any other payments to occupy or use land or to use any rights over the land, including filming rights, and income from the letting of immobile caravans and permanently moored houseboats. Some forms of income that are associated with land, such as farming, commercial woodlands, dealing in land and property, and income from mining rights, are taxed in other ways, and not under Schedule A.

3. Expenses

The old restricted rules governing which expenses could be allowed against letting income have disappeared. Instead, the general rules for expenses which are allowed against trading profits now apply to a Schedule A business. Expenses must be of a revenue rather than a capital nature, and must be incurred wholly and exclusively for the purposes of the letting.

4. Self-assessment and tax payments

Profits for letting property are taxable in the tax year ending 5 April in which they occur. Accounts have to be prepared for the actual tax year, or apportioned to the tax year if prepared to some other date, although the Inland Revenue will normally also accept accounts to 31 March.
Record keeping: Although it is not necessary under self-assessment to send a copy of the accounts with the tax return, some details must be given on the return. The records kept by the taxpayer must be adequate to support the figures of income and expenses given to the Inland Revenue. They must be kept for at least 5 years 10 months after the end of the tax year, and for longer if the Inland Revenue has already started an enquiry into the accounts.
Payments: Tax is payable under the normal self-assessment rules. Interim payments are due on 31 January in the tax year and on the following 31 July without the need for the Inland Revenue to make an assessment. Each payment is half of the amount of tax due in the preceding year. A final payment or repayment is due on the following 31 January, if required.

5. Joint ownership and Partnerships

Where property is owned jointly, each person's share of the net profit or loss is included with other personal rental profits or losses. Some cases of joint ownership, where there is substantial business activity, such as the provision of services for tenants, can amount to a property letting partnership, without being an actual trading partnership. Also, partnerships carrying on trades and professions may have ancillary letting income. In both cases, the Schedule A income is calculated in the normal way, and the profit is then divided between the partners and each is taxed on his or her share. Partnership letting income is not included with personal rental profits or losses. Property letting partnerships must prepare accounts to 5 April, but trading partnerships with ancillary letting income can use their normal accounts year end date.

6. Married couples

Where a husband and wife own a property jointly, the Inland Revenue will assume equal ownership and tax each spouse on half the income. If they do not in fact own the property equally, they can make a joint declaration to the Inland Revenue specifying that they wish to be taxed according to the actual split of ownership. Transfers of property between husbands and wives are normally free of capital gains tax. This gives scope for couples to organise the way they hold property so as to minimise their joint tax liability. For example, property could be transferred from a spouse liable to higher rate tax to one who is not, or they could adjust the proportions in which jointly owned property is held. However, they should not act without considering the inheritance tax and legal consequences of any transfers of ownership

7. Losses

A Schedule A loss in a year of assessment is automatically carried forward and set against future Schedule A profits. No claim is needed. Where there is a Schedule A loss and the amount of capital allowances included in the loss exceeds any balancing charges, the net capital allowances or the Schedule A loss, whichever is the smaller amount, can be set off against the taxpayer's other income of the same year or the following year. The relief must be claimed within 22 months of the end of the tax year in which the loss occurred. For example, relief for a loss in 2004/05 must be claimed by 31 January 2007 where property is owned jointly.

SPECIAL SITUATIONS

1. Furnished holiday lettings

A furnished holiday letting business is taxed as a trade. Although under the Schedule A rules, this does not greatly affect the calculation of the taxable profit, it does result in some other advantages.

To qualify as furnished holiday lettings, the accommodation must be:
furnished and let on a commercial basis, with a view to making profits.

available for letting to the public on a commercial basis as holiday accommodation for periods of at least 140 days in total.

let for periods of longer term occupation for not more than 155 days each year.
’Longer term occupation’ means a letting of more than 31 days when the property is in the same occupation.

let for least 70 days in total. If there are several holiday letting units which all satisfy the 140 day and seven month rules, then actual lettings for all units can be averaged to satisfy the 70 day rule.

The property need not be in an acknowledged holiday resort and the tenants do not actually have to be on holiday. If furnished holiday lettings satisfy the conditions, the activity is treated as a trade, which provides more flexibility for the tax relief of losses and more scope for capital allowances on equipment purchases. Also, individuals can obtain tax relief for pension premiums paid on the basis of the income, and can claim capital gains tax rollover, holdover or retirement relief on the disposal of a property used for this purpose.

2. 'Rent a room' relief

There is a special relief for people who let part of their only or main residence. Where gross receipts in a year are not more than £4,250 (2005/6), the income is not charged to tax. The relief is automatic unless the landlord chooses within 22 months of the end of the tax year for the normal rules to apply. This could be advantageous if he or she has made a loss, and has other Schedule A profits.

3. Gross income less than £15,000

Where an individual has gross income from a Schedule A business of less than £15,000 in a year, the tax return need only show total rents and total expenses. These totals can be prepared on a cash basis if preferred, ignoring accruals, so long as this is consistent and reasonable. Accounts do not have to be prepared, although full details have to be kept in case the Inspector asks for further information.

4. Letting part of business premises

A trader may let part of the premises in which the trade is carried out. In practice, where the income from such letting is small, it can be included in the trading accounts and taxed as part of the trading income.

OVERSEAS MATTERS

1. Letting by non-residents

Non-residents are liable to UK income tax on income from letting property in the UK. The agent, or the tenant where no agent is involved, must deduct tax from the rent, less allowable expenses paid by the agent or tenant, at the basic rate (22%) and pay it to the Inland Revenue quarterly. Where rent is less than £100 a week, this scheme does not normally have to be applied. The landlord can claim a repayment of all or part of the tax deducted at source, if further allowances are due, or must pay any extra tax which is due. If extra tax is due, this must be paid in interim and final payments under the normal self-assessment rules.

In some circumstances, overseas landlords can apply to a special Inland Revenue office to receive letting income gross. The circumstances include where the UK tax affairs are up to date, or where there is unlikely to be any UK tax liability

2. Income from overseas property

Income that UK resident individuals and companies receive from letting property overseas is chargeable to tax in the UK under Schedule D case V, and is kept separate from Schedule A income. The income and deductions (including interest) are calculated in the same way as for properties in the UK. Before 6 April 1995, the rules were more restrictive. If overseas tax has been paid on letting income, credit can be obtained against UK tax on the same property, but separate records are needed for such properties.