Property owners
Letting property
- Profits from a rental business are subject to income tax at your marginal rate of tax.
- Expenses incurred wholly and exclusively in connection with the rental business are deductible when calculating net taxable profits, provided they are not capital in nature.
- However, there is a restriction on deductions for finance costs relating to residential lettings.
- Capital expenditure is usually deductible against any capital gain on an eventual disposal of the property.
- The rules for determining whether an expense is capital or revenue in nature for tax purposes are not always straightforward, particularly in relation to repairs and maintenance.
- Capital allowances (CAs) are available on qualifying expenditure on commercial property, but not in respect of residential property; instead, the actual cost of renewing existing furnishings can be taken as a revenue deduction.
- The Rent-a-Room Scheme provides tax relief of £7,500 per year where an individual rents out a room in their only or main residence.
- There is also a £1,000 property allowance, allowing individuals to receive small amounts of rental income tax-free. An example would be receiving a few hundred pounds of income for renting out a parking space on your driveway.
Planning points
- The default position for an unincorporated property business with a turnover of up to £150,000 is to calculate taxable profits on the ‘cash’ basis (i.e. looking at the cash received and paid during the tax year).
- If you wish to elect out of the cash basis, you have until one year after the relevant self-assessment filing date to make the election (e.g. elections for 2022/23 will need to be made by 31 January 2025). Your taxable profits will then be calculated by matching income and expenditure to the period to which they relate, irrespective of the cash movements.
- Ensure that any losses are claimed, so that they can be carried forward and offset against future profits from the same rental business.
- If you let a furnished room in your home to a lodger and your gross rental income exceeds £7,500 for the year, calculate whether it is more tax efficient
- for the excess to be charged to tax; or
- for you to pay tax on your rental profits after deduction of expenses in the usual way (with no £7,500 allowance).
- You can use whichever method produces the lowest tax liability.
Principal Private Residence (PPR) Relief
- PRR relief reduces the gain on the sale of your main home, usually to nil, thus avoiding a charge to CGT. The relief applies for the time that the property is occupied as your main home, plus the final 9 months of ownership, which is extended to 36 months for
- disabled people or their spouses; or
- individuals or their spouses moving into a care home.
- Other periods of absence from the property may qualify for PPR relief as deemed occupation (e.g. if going to work full-time abroad).
- You need to show that you have occupied the property with the intention of living there as a ‘home’ with a degree of permanence.
- If you own more than one property that you actually use as a home (as opposed to always renting out), you may be able to make a PRR election, stating which property is your main home for CGT purposes.
- For UK residents, such an election must normally be submitted within two years of an additional property being available for occupation as a residence.
Planning points
- HMRC often challenge the availability of PPR relief on a property, particularly where it is a partial claim for a property that was once lived in for some of the period of ownership. Make sure you have enough evidence to show that you lived there (e.g. utility bills, council tax statements or having notified the DVLC that you lived there).
- Couples should consider jointly owning property for which no PPR election can be made, to benefit from two annual exempt amounts and (possibly) lower rates of CGT when the property is sold.
- If a residential property is not fully covered by PPR relief when sold and a tax liability arises, a CGT property return has to be filed within 60 days and the CGT on the disposal paid by that date. This is a very tight deadline. To make sure it can be met, it is sensible to make sure that you have a record of all costs you have incurred on the property and all documentation (as discussed above) to back up any PPR relief claim. This will enable the taxable gain to be calculated in time to make the 60-day payment.
- Where non-residents dispose of UK land and buildings, a 60-day report is needed even if the disposal generates a loss.
Furnished Holiday Lettings
A property that qualifies as a Furnished Holiday Letting (FHL) can benefit from various tax reliefs not generally available to property rental businesses.
- Capital allowances can be claimed for expenditure on furniture, fittings and equipment, including immediate relief on qualifying expenditure of up to £1 million under the Annual Investment Allowance (AIA).
- For CGT purposes, the disposal of an FHL is treated as the disposal of a business asset and can be ‘rolled over’ against the acquisition of replacement assets, or perhaps benefit from Business Asset Disposal Relief (BADR), which would give a 10% CGT rate on the whole gain.
- Allowable expenses (including finance costs) can be offset against the gross rental income when calculating the net taxable profits.
- Losses can only be carried forward against FHL profits in future years, not set against other rental income.
To qualify as an FHL, the property must be furnished, located in the UK or another EEA country, and let on a commercial basis with a view to realising profits.
It must also satisfy the following tests:
- The property must be available for letting to the public (not family or friends) for at least 210 days per tax year.
- The property must actually be let to the public for 105 days or more per tax year, excluding periods of continuous occupation by the same person for more than 31 days.
- The property must not normally be let for periods of long-term occupation totalling more than 155 days per tax year. A period of long-term occupation is one where the property is let to the same person for more than 31 days.
Planning points
- If your FHL property is not let for the requisite 105 days in 2023/24, but satisfies the other conditions, you may still be able to secure the tax reliefs available by electing for a ‘grace period’ to apply. This is possible if all the conditions were met in the previous year (2022/23).
- Consider making an averaging election where you have more than one FHL property and one property does not meet the occupancy test of 105 days on its own. Where the average occupancy of all the FHL properties is above 105 days, all properties will qualify.
- Check whether any capital expenditure qualifies for the AIA.
