Ainsworth & Co, Chartered Accountants and Business Advisors.

Property Rental Income and Tax

Please note that this webpage is for general information, and does not constitute advice.
Please Contact Us if you require specific advice.



Letting Unfurnished Property - Tax Overview



People who let a small number of unfurnished non-holiday properties in the UK (eg. 2 or 3) will normally be regarded as investing in the properties, rather than carrying out a business.

They would therefore not be regarded as being self-employed, but would still be required to complete a Self Assessment.


When Letting Becomes Trading


When the portfolio of properties increases, and properties are typically bought, renovated and then sold, then HMRC will regard this as trading, and therefore self-employment.


Income Tax and Self-Assessment


There is a separate section on the Self Assessment tax return form (including the online version) for property letting income and related expenses.


Class 4 National Insurance


If the properties are regarded as investments (ie. not trading) then Class 4 National Insurance would not normally be expected to be payable.

If the property business is regarded as trading, then Class 4 NI would normally be payable.


Class 2 National Insurance


Class 2 National Insurance is a more contentious issue in relation to properties; the HMRC guidance is less clear. Class 2 NI does not necessarily follow Class 4 NI.

However, normally, if the properties are regarded as investments then Class 2 NI would not normally be expected to be payable.

If the property business is regarded as trading, then Class 2 NI would normally be payable.


Repair or Renovation?


Generally, if a property is dilapidated and needs some improvement prior to tenants moving in, the money spent after purchase, but before occupancy, is not generally classified as repairs and is therefore not an expense for the Income Tax calculation.

Improvement costs to a dilapidated property are added to the original cost of the property. The combined original purchase and renovation costs are used for the Capital Gains Tax (CGT) calculation, if and when the property is sold. An exception is that free standing 'white goods' and other non-fixed items are not counted as renovation costs for CGT.

The time when the first tenant moves in is not definitively the point when improvement stops and any repairs start. On-going improvement costs might well be considered by HMRC to be renovation and not repair. Conversely, a bathroom refit after 10 years, may well be allowed as an expense if there was no significant enhancement.


Expenses


Expenses which are directly related to running the property would normally be claimable against the income from the property, in order to calculate the taxable profit.

Examples are: utilities, repairs, management fees, advertising, accounting and bookkeeping fees.

Travel directly to and from the property would also normally be allowed, for example at 45p per mile.

It may also be possible to claim for the use of your home, for example, for the time spent on paperwork.


Income Split: Is It Always 50/50?


Not necessarily.

If a married couple or a civil partnership jointly own a property, HMRC will treat the beneficial ownership as 50/50 by default. If the married couple or civil partners require a different proportion each, say 80/20, it is possible to prepare a legal document to change the beneficial ownership. HMRC are then informed of this change using Form 17

If a property is owned jointly by two people who are not married or in a civil partnership, then the property income and profit can be split however they agree, and this split must be consistent with what they submit to HMRC. The share of income and profit need not be the same as the equity/ownership share. The HMRC document which covers this PIM 1030. As of March 2014, HMRC do not offer further guidance on what reasons someone may have for choosing this arrangement, or how often the share percentages may change. Having the agreement in writing would be advisable.


Furnished Property


There are specific HMRC regulations in relation to Furnished Property.


Holiday Lettings


There are specific HMRC regulations in relation to Holiday Lettings.


HMRC Information


The HMRC Property Rental Toolkit contains lots of detailed information and guidance.


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