Property tax advice

When individuals let property, they may need to report the income to HMRC, with income tax due on any taxable rental profit. This is done by filing a self-assessment tax return of income received and expenses incurred.

If you are not already filing tax returns, you may need to register for self-assessment. The deadline to do so is 5 October following the end of the tax year in which the taxable income arose.

The non-resident landlord scheme requires the tenant or letting agent to withhold basic-rate tax from any rental payments made to a non-resident landlord. The landlord may still need to file a tax return, and any tax withheld is deducted from the UK tax liability.

The landlord can apply to HMRC to have the rent paid gross, which is generally granted, provided that their UK tax affairs are up to date. The rental income and expenses are then reported on a UK tax return.

This often applies to individuals who leave the UK and let their UK property while living abroad. If they were renting out UK property before moving abroad and keep doing so, they will still have to apply to have the rent paid gross.

The taxable income is calculated in the same way as for a UK resident.

You can claim a deduction against rental income for finance costs, such as mortgage or other loan interest. This is only available on debt incurred to acquire land and buildings or to finance repairs and improvements.

The rules governing the deductibility of finance costs, such as mortgage interest, for individuals have been restricted, however. Instead of a simple deduction reducing the overall taxable profit, relief is given as a basic-rate (20%) credit against the tax payable on the rental profit. Before 6 April 2020, transitional rules were in place.

Care should be taken when increasing the debt against a property in the letting business. If this is done to extract capital for use outside the business, the tax relief available may be restricted.

This is a complex area, and you should seek detailed, professional advice before taking any action.

It is possible to run a rental business through a company. The matters that should be considered include income tax and corporation tax rates, SDLT liabilities, and the impact of a future sale of the property in the company.

The tax analysis will depend on the number of properties comprising the business, whether there is an existing rental business or you are starting a new one, and whether or not you or a family member might need to occupy one of the properties.

Where money is borrowed to fund the rental business, the restriction on deductibility of finance charges does not apply to companies.

Capital gains tax (CGT) may be due on sales of UK residential property. The gain subject to tax is the difference between the cost of acquiring the property, plus any allowable costs of sale and acquisition, and the sale proceeds. Costs of improving the property during the period of ownership, if reflected in the state of the property at the date of sale, can also be deducted.

Private residence relief (sometimes called “main residence relief”), the CGT annual exempt amount and any current year or brought forward capital losses may be available to reduce the gain. Any taxable gain is then subject to capital gains tax at either 18% or 24%, depending on the individual’s overall tax position.

When a UK residential property is sold, any gain is generally subject to capital gains tax (CGT).

Private residence relief (PRR) exempts some or all of the gain when an individual has made a disposal of their only or main residence. PRR is also frequently called “‘principal private residence relief” or “PPR relief”.

The amount of private residence relief you can claim depends on various factors, including the period of occupation as an individual’s main residence, ownership of other properties and the size of any garden or grounds.

Periods of “deemed occupation” can also reduce the size of a gain arising on the sale of a property, irrespective of whether or not the individual was living there. The most common of these is the final nine months of ownership of a property, extended to 36 months in the case of disabled individuals and some care home residents.

In cases where an individual owns multiple properties, the availability of PPR will be influenced by whether a PPR election was made to nominate a particular property as the main residence. There are prescribed conditions and time limits for these elections, and you should seek professional advice when considering this.