Are you considering letting out a property in the UK and wondering about the property tax implications? In this blog, we’ll provide you with valuable insights into how property tax works for landlords in the United Kingdom.
The Cash Basis and Taxable Profit
If your gross receipts from letting out the property do not exceed £150,000 in a tax year, your taxable profit will be calculated using the cash basis. This means that each tax year, you will be taxed on rent received less allowable expenses paid, which are the amounts physically received and paid during that specific year.
For example, if your rent is paid monthly in arrears, and a payment due on 31 March 2023 is not received until 15 April 2023, it will be taxable in the 2023/24 tax year, even though it relates to the previous tax year.
Expenses are deductible from rents only if they are ‘wholly and exclusively’ for the business of letting. These expenses may include fees for a letting agent, insurance, travel costs, water charges, council tax (if paid by you), and the cost of repairs.
If you need to replace the windows or central heating system, it will be regarded as an allowable repair expense. However, if the replacement is considered an improvement, it won’t be an allowable expense that can be set against rental income. However, the use of new technology as part of a repair does not necessarily turn the repair into an improvement.
Relief for Loan Interest
If you have taken out a loan to purchase the property, relief will be available for the interest paid at a rate of 20%. This relief will be deducted from your final tax liability. Nonetheless, if your property income for the year is less than the amount of interest eligible for relief, the relief will be restricted to 20% of the property income, and the excess interest can be carried forward for relief in a subsequent year.
Relief for Furnished Properties
If you let the property furnished, you can claim relief for the cost of replacing domestic items such as furniture, furnishings, household appliances, and kitchenware.
You have the option to claim a property allowance of £1,000 instead of the allowable expenses and mortgage interest relief, if your property costs are below the allowance or if you prefer a simpler expense calculation process.
Tax Rates, Losses and Carry-Forward
Property income is taxed at 20% if you are a basic rate taxpayer, at 40% if you are a higher rate taxpayer, and at 45% if your income is the higher rate band.
If your expenses exceed your rental income in a tax year, you will have no tax liability for that year. The loss arising can be carried forward and set against your rental income in future years. However, you cannot use the loss against other types of income or carry it back against rental income from previous years.
If you do not already fill in a tax return, you must inform HMRC that you will be chargeable to tax for this new source of rental income. If you start letting the property in 2023/24, you have until 5 October 2024 to notify HMRC, as there are penalties for failure to notify.
We hope this guide provides you with a clear understanding of property tax in the UK as a landlord. It is important to keep accurate records of your rental income and expenses to ensure you comply with tax regulations and make the most of available reliefs. If you have any specific questions or need further assistance, it is advisable to consult with a tax professional or accountant for personalized advice.