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TAXguide 01/17 - Let property

This TAXguide provides guidance on the tax issues connected with let property from the point of view of the landlord. It concentrates on residential property and covers the new rules for the deduction of finance charges, which come into effect from 6 April 2017 and is aimed at practitioners who are advising individuals who have bought property as an investment, rather than commercial property development businesses. Read a summary here, Tax Faculty members can download the full guide.

TAXguide 01/17

Tax Faculty members can download this guidance in full.

Download

Please note that this guide was updated on 2 July 2018 to reflect changes introduced in Finance Act 2017 and Finance (No 2) Act 2017

Edited by Sarah Ghaffari, SME business Tax Manager at the Tax Faculty, this TAXguide on tax issues related to letting residential properties has been written by Tax Faculty volunteer Rebecca Cave. 

Overview

Individual landlords are normally taxed on the annual profits they make from letting their property under rules for property income set out in Part 3, Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005). This part of ITTOIA 2005 also includes provisions for overseas let property, where, if the owner is not domiciled in the UK, the remittance basis may apply (see section 8).

A typical property income business will hold the properties for the medium to long term and cover all the expenses with the rents received. Landlords who hold properties for a shorter period, with a view to realising a profit on the sale of the property, may have their property business taxed as a trade rather than as property income, including any profit made on the sale of the property (see section 5).

The tax treatment of property income from an unincorporated lettings business differs from the treatment of an unincorporated trading business in a number of respects, some which can be advantageous:

  • the annual profits are not subject to national insurance;
  • a residential lettings business does not have to be VAT-registered, unless it is a holiday lettings business, though beware the flat rate scheme trap (see section 9.2);
  • profits made on the disposal of a property are generally taxed as a capital gain, allowing any available personal annual exemption to be deducted and possibly a lower rate of tax applied (see section 7).

Disadvantages of the property income rules are:

  • losses cannot be set against other income;
  • expenditure connected with aborted sales or purchases of property is not deductible;
  • sales of residential property do not qualify for entrepreneurs’ relief (ER) unless the property was used in a furnished holiday letting (FHL) business;
  • the value of the properties will be subject to inheritance tax (IHT) on death (see section 9);
  • it is difficult to transfer ownership of the unincorporated business without high tax charges, as rollover relief does not apply to the value of the residential property, unless it is used in a FHL business (see section 6). 

Full TAXguide

The full 36-page guide covers:

 
Section Covers
1  The property investment business  An overview of property income rules.
What is property income?
When does the rental business start or finish? 
2 Who is taxed and how is the tax paid? Jointly held property
Tax return
Record-keeping
When is the tax payable?
Income losses
Capital gains or losses
3 Tax allowable expenditure Types of expenses
Timing
Repairs or improvement?
Furnishings and domestic items
What is meant by furnished?
Interest and loans
Extracting capital
Capital allowances
Cost of own time
Travelling costs
Houses in multiple occupation
4 How should the property be held? Jointly held property
Partnership or LLP?
Company
5 Trading or investment? No choice
Anti-avoidance rules
Tax consequences
Inheritance tax
6 Furnished holiday lettings Location of the property
Required periods of letting
Losses
Advantages of FHL
Disadvantages of FHL
VAT
Local taxation and planning
Private use
Inheritance tax
7 Capital gains What is the taxable gain?
Entrepreneurs’ relief
Annual exemption
Main residence election
Lettings relief
8 Overseas issues Letting overseas property
Gains on overseas property
Holding foreign let property through a company
Non-resident owners
9 VAT Registration
Flat rate scheme
Partial exemption
10 Rent a room relief  
11 Taxes on purchase Who pays?
SDLT
LBTT in Scotland

About the author

Rebecca Cave CTA FCA MBA qualified as a chartered accountant with KPMG in Norwich and as a chartered tax adviser while working for Robson Rhodes in Cambridge. Her primary role is now as consultant tax policy editor at AccountingWEB. She also writes newsletters for various publishers and is the co-author of the Capital Gains Tax annual and Capital Gains Tax Reliefs for SMEs and Entrepreneurs, both published by Bloomsbury Professional. She is also edits Bloomsbury’s Tax Rates and Tables.

Rebecca serves on the ICAEW Tax Faculty’s SME Business Tax Committee, the CIOT’s Owner Managed Business Tax sub-committee, and the CIOT Mid-Anglia branch committee.