Taxation of Property Income
What are the tax implications of letting a property?
Income from the letting of property is taxable and therefore you should inform HM Revenue & Customs that you are letting a property so that they will issue you with a self assessment tax return.
Income from property is the rents received less any allowable expenses.
The following are allowable expenses: -
- interest payments on your buy-to-let mortgage (but not capital repayments)
- mortgage arrangement costs
- maintenance costs (such as painting and decorating)
- if the property is furnished then a 10% a year wear and tear allowance is available.
- cleaning
- ground rent, service charges and buildings insurance, where applicable
- advertising the property
- letting agent's fees
- accountant's fees
- insurance policies on white goods, gas boilers, plumbing cover
- reasonable travel costs for viewings, rent collection, etc.
The above list is not exhaustive and is intended to give an illustration of the kind of expenses allowable.
Landlords need to notify HM Revenue & Customs (HMRC) that they have such income and they must keep records and have accounts drawn up in accordance with normal accounting principals. The accounts are normally drawn up to the period/year ended 5th April to coincide with the tax year.
Property income is normally taxed as unearned income under Schedule A. This means that if a loss is made the loss cannot be used against earned income, but only against other Schedule A income. If a loss is made and cannot be relieved in the current tax year it is carried forward for relief against profits in future tax years.
What happens if you sell the property?
If you sell a rental property you will be liable to capital gains tax (CGT) on the difference between the cost of the property and the selling price, less certain allowances and tax reliefs. The rate of capital gains tax currently 18%.
The selling price is the total sales value of the property less:
- Estate agents fees
- Solicitors' fees
- Advertising
The cost of the property is the original cost of the property plus:
- Legal fees on purchase
- Stamp duty paid on purchase
- Valuation and survey fees
- Improvements made, such as installation of central heating, double glazing, or and extension. (Furniture, fittings or repairs cannot be claimed).
Note you cannot claim the costs of any early repayment charges if you are redeeming a mortgage early.
Every person has a CGT annual exemption available. The annual exemption is based on the individual person, not the property transaction. For the 2008/2009 tax year this is £9,600 per person. If a property is sold that is jointly owned by two people each person gets their own annual exemption.
It is very important to pre-plan and consider the long-term tax effects of your actions when investing in properties. Good planning can make large savings in the overall tax payable.
Download the Taxation of Property Income fact sheet as a pdf
If you have any queries or require professional advice then please do not hesitate to contact us.
