Calculation of Taxable Income
The receipt of rental income is treated as the income of a “property business”. There are rules for computing property business profits. All income from all of the landlord’s properties is added together for each tax year. Certain expenses are deducted and the net amount is assessable to income tax.
In calculating property business profits, the following expenses are deductible, provided they are wholly and exclusively for the purpose of the rented business:
- agents fees;
- managing expenses;
- service charges
- management costs
- rent collections costs
- replacing fixtures fittings and furniture
- general maintenance
- water charges
- council tax
- ground rents
- interest on a loan to acquire or improve the property
“Capital” expenditure (i.e. building and improvements) is not an allowable deduction. A deduction is allowed for revenue or current expenditure e.g. repairs as opposed to improvements. For example, the replacement of an item in need of repair would be regarded as a repair whereas the installation of a whole new system may be regarded as an improvement.
Deprecation or the write off of capital expenditure over time is not generally allowable for tax purposes. Capital allowances (which are allowed in non-property business) are not available for expenditure on plant and machinery in connection with a dwellinghouse. Instead, a limited form of capital allowance is available for furnished accommodation. This allows a deduction for the expense of renewing furniture to the same standard. Any improvement element is disallowed.
A “round sum” “wear and tear” allowance of 10% is a notional alternative to the record keeping which would be required if actual wear and tear allowance was claimed. The notional amount is likely to prove more advantageous than the actual payment basis and is likely to save considerable record keeping.
From 6th April 2017 an allowance of £1,000 for minor rental income property on the same basis as the genereal small business income allowance.
If income for a particular year is less than expenditure, a loss arises. If a landlord owns several properties this will effectively reduce taxable income in respect of other properties, as all income is added together. An overall loss can be carried forward against future property business profits until the loss is fully used up.
Expenditure creating a loss in a particular year can be allowed as a deduction in the following year’s calculation as if it was an expense in that year. Unlike other businesses, rental losses cannot be offset against other types of income. Therefore a loss from a property business will not reduce tax payable on other income sources in the same year.
There are special rules in respect of particular types of the purchase prices paid for certain leases. As in Ireland, a premium (i.e. a lump sum) paid for a lease less than 50 years in length is treated partly as an income tax receipt rather than a capital gains. As in Ireland, this will increase the effective tax rate on this capital sum since the higher income tax rates are significantly higher than the capital gains tax rate.
Furnished holiday lettings
There are special rules for commercial letting of furnished holiday accommodation. It is treated as property business income but it is treated as if the profits arose from a single and separate business.
In order to qualify as “furnished holiday accommodation”, the property must be situated in the UK, let furnished on a commercial basis and be available for commercial letting to the public as holiday accommodation not less than 40 days a year. It must actually be let for 70 days. It cannot be let for periods of long-term occupation in excess of 155 days a year.
The profits are not pooled with other income. Relief may be claimed for losses. Trading losses can be offset against all other income in the year in which it is incurred. This is unlike general property business losses which are only offset against property profits.
Rent a room relief
Rent a room relief exists in the United Kingdom in much the same way as in Ireland. It relates to the letting of a room in the taxpayer’s residence.
Provided the conditions are satisfied, gross annual receipts of £7,500 (2018) or below are exempt from tax. It is a condition that the individual lets furnished accommodation in his main residence in order for the exemption to apply.
Where the income exceeds £7,500 the taxpayer pays tax on the excess gross rent without relief for expenses. He has the option to apply standard rules.
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