We are focused on ensuring that your tax affairs are up to date and that you are taking advantage of the tax reliefs available to you.
If you rent out your property or a second home you must inform HM Revenue & Customs by 5 October following the end of the tax year when the property was first let. Each year you must include the rental income and expenditure on your self assessment tax return.
You are taxed on your rental profits each year, with any losses carried forwards for use against future profits.
You may only deduct expenses that are the result of letting out a property. A summary of deductible expenses is included below, however it is first worth noting two key deductions which are often overlooked:
Replacement furniture relief
The wear and tear allowance for furnished lets was abolished in April 2016 and replaced by a more general relief for all types of rental properties.
Relief is given for 'domestic items' which includes:
- Moveable furniture
- Furnishings such as carpets, curtains and linen
- Household appliances such as fridges and freezers
- Kitchenware such as crockery and cutlery
Items must be provided solely for the use of the tenant within the residential property.
Relief is not available if the Rent a Room Scheme is used (see below).
Tax relief will be given against rental income for:
- The cost of the replacement item
- Less the cost of any element of improvement (beyond the nearest modern equivalent)
- Less any proceeds of sale of the old item
- Plus any costs of disposing of the old item
The interest paid on a mortgage obtained to purchase the let property is tax deductible (any capital payments are not tax deductible). If you remortgage a rental property to withdraw equity or secure a mortgage on a new property then a proportion of the interest on this element of the mortgage may also be tax deductible.
With effect from 6 April 2017 the tax deductibility of mortgage interest and finance charges (i.e. mortgage arrangement fees) will be restricted such that only basic rate income tax relief can be claimed by higher rate tax payers. This restriction is phased in over a 4 year period, meaning that in the 2017-18 tax year a landlord will receive full tax relief on 75% of the finance charges and only basic rate tax relief on the remaining 25%. This change will result in an increased tax liability for higher rate tax payers and may also lead to some individuals being pushed into the higher rates of tax, so an early portfolio review would be recommended.
Other general expenses are as follows:
- Electricity and gas bills (unless paid directly by the tenant)
- Decoration and repairs (but not improvements to the property, such as extensions)
- Rent or ground rent that you have to pay
- Managing agent or letting agent fees
- Certain legal fees on renewing short leases
- Gas safety certificates
- Travel, telephone or other administrative costs directly related to the rental activities
Rent a Room Scheme
If you are a resident landlord or run a bed and breakfast or guest house, this scheme allows you to earn up to £7,500 of rental income per year on a tax free basis, which can be more tax efficient than deducting a proportion of costs from the rental income each year. This allowance is halved if you share the property with your partner or someone else.
If you earn less than the threshold the tax exemption is automatic and you do not need to complete a personal tax return each year. If the rental income (before deduction of costs) is more than £7,500 you must complete a tax return to claim the exemption each year.