The following definitions set out how property income is calculated and taxed:
- Rental income – includes rents, amounts received to cover use of furniture, cleaning of communal areas, hot water, heating and repairs to property.
- Allowable expenses – any expense that you have laid out “wholly and exclusively” for the purposes of renting out a property can be deducted when working out net property income subject to tax. Costs include:
- general maintenance and repairs to the property, but not improvements (such as replacing a laminate kitchen worktop with a granite worktop)
- water rates, council tax, gas and electricity
- insurance, such as landlords’ policies for buildings, contents and public liability
- costs of services, including the wages of gardeners and cleaners
- letting agent fees and management fees
- legal fees for lets of a year or less, or for renewing a lease for less than 50 years
- accountant’s fees
- rents (if you’re sub-letting), ground rents and service charges
- direct costs such as phone calls, stationery and advertising for new tenants
- vehicle running costs (only the proportion used for your rental business) including mileage rate deductions for business motoring costs
- Expenses you cannot claim – include:
- private phone calls
- personal expenses
- repayment of loan capital – you can only claim for interest on the loan but see following section.
- Interest paid on mortgages and loans – individuals that run a property business can only claim a 20% tax credit. The gross interest paid is no longer deductible as an expense. This means that tax relief is restricted to 20%. This does not apply if you have incorporated your property business.
- Incorporating your property business – if you run your property business inside a limited company structure, any profits and gains will be taxed at corporation tax rates, currently 19%. As indicated above, companies can deduct mortgage and loan interest as an expense.
Unsurprisingly, there are grey areas that you will need to consider. Before embarking on the acquisition or disposal of a rental property, perhaps for the first time, it is well worth investing in a planning session to consider the most tax efficient way to organise matters. We can help. Please call to discuss your options.