| The tax implications of property
letting can be confusing. A landlord has two taxes to consider:
Income Tax and Capital Gains Tax.
1. Income tax is payable
on the net income from property letting irrespective of where you
live. It is your responsibility to inform the Inland Revenue of
your letting income whether you are a resident or a non-resident
landlord. It is important to note that the Inland Revenue can enforce
the agent to disclose the names of all landlords for whom they act.
2. The letting income on which
you are subject to tax is the gross income less certain expenses
incurred in the letting.
3. The allowable expenses are
diverse and usually include:
(i) Loan interest (subject to certain conditions).
(ii) Insurance, ground rent and service charges.
(iii) Costs of providing services included in the
rent (electricity, cleaning etc).
(iv) Legal and accounting charges.
(v) Costs of repairs, but not improvements.
(vi) Agent’s fees.
The Inland Revenue also allows a deduction for
wear and tear of furniture, fixtures and fittings. This is when
the property is let furnished and no claim is made for the cost
of replacing existing furniture, fixtures and fittings. The wear
and tear allowance is currently 10% of the annual rent.
For many tax-payers, these expenses and the wear
and tear allowance can exceed their income, extinguishing any tax
liability
Expenses not allowed by the Inland Revenue:
(i) Cost of preparing a property for letting.
(ii) Expenditure on initially furnishing or improving
the property.
(iii) Capital repayment elements of mortgages.
(iv) improvements to the property
Even if you are non-resident (which means
you live abroad permanently, whether a UK Citizen or not, or go
to work abroad for a lengthy period) then, like a UK resident, the
excess of income over allowable expenses is subject to UK income
tax. However, there are specific procedures for collecting income
tax from non-resident landlords.
The following general points may be of interest:
1. The agent who collects rent for the non-resident
landlord must deduct tax at source from his income and pay the tax
deducted to the Inland Revenue unless specifically exempt by written
authority from the Inland Revenue not to do so.
2. It is possible to apply to the Inland Revenue
for the agent to be exempt from withholding income tax at source
(ask your agent for an application form to receive UK rental income
with no tax deduction). This exemption is, however, granted at the
Inland Revenue’s discretion.
3. At the end of each tax year, your tax position
must be resolved with the Inland Revenue. As with a resident landlord,
this usually involves submission of a UK tax return showing details
of your letting income and expenses. If you have approval from the
Inland Revenue to receive rents gross and do not submit annual tax
returns to the Inland Revenue you may be infringing tax regulations
and, furthermore any< exemption that has been granted may be withdrawn.
4. It is normal for non-residents to appoint an
accountant to act for them whilst they are abroad.
As a Landlord, you should be aware that there
is a risk that you might be exposed to Capital Gains Tax when you
come to sell your property. Always take professional advice, but
as a word of comfort, the following are unlikely to incur this tax:
- Non-resident landlords.
- Those letting a former home for no more than three years.
- Those letting a former home when obliged to work elsewhere
in the UK for no more than four years.
Sometimes a tenant proposes a ‘premium
lease’ where an up-front rental payment with a nominal rent
known as a ‘premium’ is offered to the landlord. We
always recommend that clients take careful legal and financial advice
in these circumstances in order to establish whether this type of
arrangement is beneficial from a taxation point of view.
Our advice is simple:
- Under no circumstances should you conceal property income from
the Inland Revenue.
- If you are not UK-resident, ensure you apply to the Inland Revenue
for rents to be received gross as early as possible. There is
no advantage in delaying.
- Take steps to mitigate your tax liabilities by seeking professional
advice from a reputable firm of accountants who will advise on
Income Tax and Capital Gains Tax issues.
- Retain all invoices for sundry expenses such as ground rents,
repairs, etc and ensure that the nature of the work is clearly
stipulated on the invoice.
- A good detailed inventory and record of damages must be drawn
up at the beginning and end of each letting period. This may well
avert a potential dispute over “replacement costs”
which are allowable if no “wear and tear” allowance
is claimed.
- Some agents do offer a tax service in conjunction with a firm
of accountants, which is a benefit and a cost-effective way of
dealing with the Inland Revenue on your behalf. If in doubt, seek
professional advice.
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