Property owners
Letting property
- 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. An exception is finance costs of residential landlords - see Furnished Holiday 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, in which the actual cost of renewing existing furnishings can be taken as a revenue deduction.
- The Rent-a-Room rules provide 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 2023/24 will need to be made by 31 January 2026). 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
- 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.
Furnished Holiday Lettings
A property that qualifies as a Furnished Holiday Letting (FHL) can currently benefit from various tax reliefs not generally available to property rental businesses. However, these tax breaks will be ending after 5 April 2025, which may have serious consequences for those currently benefitting from the FHL regime (see below).
To qualify as a 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 various other criteria, which ensure that the property is mainly let short-term to holiday makers.
When FHL status disappears on 6 April 2025, the following consequences will arise:
- Finance costs (such as mortgage interest and arrangement fees) will no longer be deductible when calculating property business profits for tax purposes, so taxable profits will be higher. Instead, a ‘tax reducer’ equal to 20% of the disallowed finance costs will be given when calculating the taxpayer’s final tax liability (although this deduction can be subject to restrictions). This means that the property will be treated like a normal residential let.
- Unless someone is (and after the disallowance of finance costs remains) a basic rate taxpayer, this may significantly increase the landlord’s income tax bills.
- FHL income will no longer count as pensionable income.
- Capital allowances will not be able to be claimed on fixtures and fittings (e.g. beds, tables) for use in the property; instead, tax relief will only be given when such assets are replaced (without improvement), not when they are first installed.
- Business Asset Disposal Relief (BADR) will no longer potentially be available on the sale of a FHL property; this means that the rate of CGT on any gain will be either 18% or 24%, rather than 10%.
- CGT gift relief and rollover relief will not be available. Gift relief (or ‘holdover relief’) enables gifts to be made (e.g. to a family member) without triggering any immediate CGT charge; rollover relief enables a similar deferral of tax, where a FHL property is sold and the proceeds reinvested in another qualifying property up to 3 years from when the first property is sold. Both these reliefs require a claim.
Planning points
- If your FHL property is not let short-term for the requisite 105 days in 2024/25, 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 (2023/24).
- 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 on furniture, fittings and equipment qualifies for the 100% Annual Investment Allowance (AIA).
- Budget for any increased tax bills arising from the upcoming disallowance of finance costs.
- If the increased tax bills make the letting business unviable for you, consider selling your FHL properties before the rules change (i.e. by 5 April 2025), so that you may (subject to meeting all the relevant conditions for the relief) get BADR on the disposal.
- If your intention is to eventually gift your FHL properties to a child, it may be worth bringing this forward to the current tax year, so that a gift relief claim may be made to defer any capital gain that arises.
Private Residence Relief (PPR)
- PRR 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 moving into a care home.
- Other periods of absence from the property may qualify for PRR as deemed occupation (e.g. if working 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 PRR 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 PRR 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 PRR 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 ensure that you have a record of all costs you have incurred on the property and all documentation (as discussed above) to back up any PRR 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.