If you’re thinking of becoming involved in the property market it is imperative that you take the time to fully understand the applicable UK property tax implications. Our easy guide, supplied by Philip Woolfson, senior partner at the north London accountants Tuchbands, will get you up to speed quickly.
The Taxes UK Property Owners Should Know
- Stamp Duty Land Tax
- Annual Tax on Enveloped Dwellings
- Council Tax
- Income Tax
- Capital Gains Tax (CGT)
- Inheritance Tax.
Tax on Rental Properties
There are different rules concerning tax for residential properties, commercial properties and furnished holiday lettings. This article will focus mainly on residential properties purchased for letting.
HM Revenue & Customs (HMRC) have a reporting threshold which requires declaration where rental income is more than £2,500 per year. In practise this means that most people renting out properties will have to declare their income and expenses on a Self-Assessment Tax Return.
What Expenses Can be Claimed?
The following is a list of the most common expenses that can be claimed against property lettings income;
- Legal fees for tenancy agreements of 1 year or less
- Legal fees for debt collection
- Accountants fees
- Financial Expenses
- 10% Wear and Tear Allowance on furnished property
- Utility bills
- Ground rent and service charges
- Council tax
- Cleaning or gardening services
- Other direct costs such as phone calls, stationery and advertising
- Motor expenses – by mileage or proportion
Only the interest payable on any loan or mortgage taken out to purchase the property can be claimed against tax and not any capital repayments.
Where a repayment mortgage has been taken out it is, therefore, important to separate out the interest element from the capital repayment element. Interest on loans to improve the property are claimable in addition to interest on loans to purchase the property.
Interest on re- mortgages can also be reclaimed although there may be limitations if the property has been re-mortgaged beyond its initial purchase price. However, where there is more than one property in a portfolio, the amount of equity in the whole portfolio may be used to ensure that the limitation has not been breached and to enable re-mortgages for amounts higher than the purchase price.
Also included in financial expenses is the cost of arranging finance including lenders charges, mortgage survey fees and arrangement fees. Lenders charges are quite high in this climate of low interest rates so should not be overlooked.
The Wear and Tear Allowance
Landlords of furnished properties are entitled to claim 10% of the rental income as a wear and tear allowance. However if the landlord normally pays certain expenses which would typically be paid by the tenant such as utility bills then these have to be deducted from the rent before calculating the wear and tear allowance.
The wear and tear allowance is designed to cover the cost of repairing or replacing furniture and appliances so for that reason repairing or replacing such items cannot be treated as a separate, claimable cost.
Repairs and Improvements
It is always important to distinguish between what is considered a repair and what is counted as an improvement.
Repairs are allowable against property income whereas improvements are not allowable against property income and add to the capital value of the property. Improvements can, therefore, only be claimed against capital gains tax when the property is sold.
Some costs on a property are clearly examples of improvements because they will add to its overall value, for instance:
- loft extensions
- creating new rooms
- adding a bathroom
However there are certain improvements, which are still classified as improvements but for which there is the possibility of the Landlords Energy-Saving Allowance of up to £1,500 per property covering the following improvements:
- Loft insulation
- Cavity wall insulation
- Solid wall insulation
- Draught proofing
- Hot water system insulation
- Floor insulation
Some simple examples of repairs, which are allowable, are:
- Painting and decorating
- Damp or rot treatment
- Fixing broken windows, furniture, appliances
- Replacing roof slates, gutters
Where the situation is less straight-forward is when it is difficult to clearly define whether alterations are repairs or improvements, such as:
- A new kitchen
- Complete refurbishment of a property in a run-down state
HMRC allow replacement on a like-for-like basis only, if it is to be treated as a repair, and they do accept that the replacement might include more modern materials.
For example a budget kitchen which was installed 20 years ago cannot be replicated because these days more modern materials will be used. So if it is replaced with another budget kitchen and not upgraded to, for example, one with granite worktops and additional cupboards the likelihood is that HMRC will allow this expenditure against rental income as a repair and not an improvement.
It is worthwhile keeping “before and after” photos and as much proof of what was done as possible.
Similarly where old, single-glazed windows are replaced with modern double glazed windows then this will normally be considered a repair and not an improvement.
There is a large body of legislation covering these situations and professional tax advice should always be sought as there are some common mis-conceptions about what costs are and are not claimable against tax.
- Carpets: Carpeting or flooring costs cannot be claimed against rental income.
- Electrical work. Rewiring and replacing what was there before can be claimed but not the installation of new electrical points.
- Appliances: The cost of replacing any appliances cannot be claimed. As explained above, the wear and tear allowance is designed to cover the cost of repairing or replacing appliances.
Property can be held individually or jointly and where the property is registered jointly there is an automatic assumption that the income will be split equally between the joint owners. It is common for properties to be purchased in joint names with married couples.
What is not always appreciated is that for a married couple to vary the 50:50 split of rental income the property would need to be registered as tenants in common, a declaration of trust would need to be drawn up and Form 17 submitted to HMRC.
This has to be before the rental income is changed from the 50-50 split and cannot be done retrospectively. So again, seek professional advice for your particular circumstances if there may be a financial advantage to having an uneven split, for instance if one partner does not work or has a much lower income.
For advice specific to your situation please contact a certified tax professional.