Property rental business
Is a rental property considered a business?
If you own a rental property that is your primary source of income, or if you own more than one rental property and acquire more properties with the intention of letting them out, then that is considered a business.
In the UK most landlords will be running a property rental business. There are special rules for Rent a Room, Furnished Holiday Lettings, Hotels and Guest Houses which are excluded from this article.
The basis of determining ‘rent’
Rent is assessed on a cash basis if your gross income is less than £150,000. You can elect to use the accruals basis if your income is less than £150,000. If the gross income is more than £150,000, the income and expenses must be recorded using the accruals basis.
The main rule for allowable expenses is that they must be wholly and exclusively incurred in the course of the letting business. It is important to differentiate revenue and maintenance costs from initial and capital costs. Capital, set-up costs and improvements to the property, are normally treated as increasing the base cost of the investment for Capital Gains Tax purposes against the calculation of the gain on sale of the investment property.
The split between capital and revenue is a grey area. For example, if you buy a property for letting and carry out some redecoration work before letting it out, the expenditure would be treated as revenue. If, however, you bought a property which was not in a good state of repair and you paid a significantly lower price as a result, the refurbishment work is more likely to be of a capital nature.
Allowable expenses will include insurance, managing agent fees, repairs and maintenance, services, administrative costs, travel (to the property solely for the purpose of the property business), finance costs for commercial properties and any other revenue expenses in connection with the property. For residential properties (excluding furnished holiday lettings) finance costs (interest and bank charges) paid are allowed as a tax credit of 20% of the amount paid against the tax liability on the rental income after deducting the other expenses.
The cost of moveable fittings and furnishings is restricted to the cost of replacement items only. You cannot claim the cost of a new item which is not replacing a previous item at the property.
If you have a letting agent, they may incur other costs on your behalf which will normally be allowable.
Whilst profits are added to a taxpayer’s taxable income, losses cannot normally be set off against income from other sources. Losses are carried forward to offset against future rental profits, with some minor restrictions.
If you have received untaxed income and it produces a tax liability, you are obliged to inform HM Revenue and Customs by 5th October following 5th April of the relevant tax year. The Self Assessment Income Tax Return must include the UK Property page or the Foreign page as appropriate.
All Self Assessment Income Tax Returns for the year ending on 5th April must be filed by the following 31st October if a paper return is being used or the following 31st January if the return is filed online. The calculation of the tax liability takes into account all of the landlord’s other income and allowances and for this reason, it is complicated.
Sale of the property
On disposal of the property, any increase in value is potentially subject to capital gains tax. The gain is calculated by deducting the acquisition costs and enhancement expenditure (31st March 1982 value plus enhancement expenditure since that date, if property was held on 31st March 1982) from the sales proceeds. Some reliefs are available and there is a personal annual exempt amount. Substantial reliefs are available if the landlord has lived in the property as his only and principal private residence at any time since 31st March 1982. If there is a Capital Loss then this is deducted from any other gains in the year or carried forward and it can be offset against future gains. If you are resident in the UK and there is tax to pay on a residential property or you are non resident and sell any property (whether there is tax to pay or not) then you must make a report and pay the tax to HMRC within 60 days of completion of the sale.
You are resident in the UK if you normally live in the UK and only go abroad for holidays or short business trips. If you are in the UK for 183 or more days in any tax year, you are automatically resident in the UK for that tax year. If you are not in the UK at all in any tax year you are non-resident for that tax year. If you believe that you may be non-resident then you must pass several tests.
This note is provided as a general overview. It should not be relied upon for taxation purposes, as it cannot provide a complete analysis of the law in any particular circumstance. Taxation is complex and you should take advice specific to your circumstances.
© Thandi Nicholls Ltd 2023 All Rights Reserved – The above articles are provided for guidance only and may not cover your personal circumstances so you should not rely on them. It is important that you seek appropriate professional advice which takes into account your personal circumstances where you can provide the full facts of the case and all documents related to your case. Thandi Nicholls Ltd t/a uklandlordtax.co.uk, S S Thandi and M S Bains cannot be held responsible for the consequences of any action or the consequences of deciding not to act.
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