Taxation of Residential Property Income
This article looks only at private individuals owning and renting out residential property, commonly referred to as ‘Buy-to-Let’ (BTL) properties. Companies owning BTL properties are covered in a separate article.
Property business owners aim to generate income from land and property ownership. Property income calculations are prepared for each tax year and must be filed under self-assessment.
The cash basis is used by default if the gross property income does not exceed £150,000 for the tax year. If the gross property income exceeds this limit property income profits must be calculated using the accrual basis. When calculating property income profits on a cash basis income and expenses are accounted for when money is received or paid. For the accrual basis profits must be calculated by taking the rent receivable and deducting the allowable expenses payable.
Allowable Expenses
Under both the cash basis and the accruals basis, allowable expenses are deductible when calculating property income profit. These expenses must be incurred wholly and exclusively for the purpose of letting and can include agent’s fees, commissions, repairs, landlord insurance, etc.
Water charges and council tax are deductible expenses if paid by the landlord. If a landlord uses their vehicle to manage the property business, they can either claim a proportion of the actual motor expenses related to the business or use flat rate expenses for business miles. The flat rates are 45p per business mile for the first 10,000 miles and 25p thereafter. It’s important to note that this flat rate covers the costs of buying, running, and maintaining the vehicle, including fuel, servicing, repairs, and insurance.
For an expense to be considered allowable, it must be revenue in nature; therefore capital expenditures are not deductible. However, under the accrual basis, capital allowances are available. Similarly, under the cash basis, relief for capital expenditure is provided by deducting the cost of the asset when it is acquired.
It’s worth noting that there is no relief for the initial cost of furniture and domestic items provided for use in a residential property under either the cash basis or the accrual basis. However relief can be claimed for the cost of replacing domestic items used in the property under both the cash and accrual bases.
Interest Paid on Residential Rental Property
Interest paid on the mortgage for residential rental property is not a deductible expense. Instead, interest is only eligible for basic rate tax relief at 20%, which is applied as a reduction in an individual’s income tax liability.
Relief at the basic rate is available on the lowest of the following:
Eligible interest, or
Property income for the year less property losses carried forward, or
Adjusted total income, i.e., non-savings income less personal allowance.
Regarding interest, it’s important to note that relief is only available if the loan is taken out wholly and exclusively for business purposes. If any portion of the loan is used for private purposes, the interest relating to that part will not be eligible for relief. The only exception is when the property is first introduced into a property business, and at the time of this introduction, the loan does not exceed the value of the property.
Property Business Losses
A landlord renting out more than one property operates a single property business. Profits and losses from all properties are pooled together to determine the overall profit or loss. Profits are taxed at non-savings rates: 20%, 40%, or 45%. If the overall result is a loss, it can only be carried forward to set against future property profits; it cannot be offset against non-property income and cannot be carried back to a previous tax year.
Reliefs
Rent-a-Room Relief: This relief is available if the landlord rents out a room in their main residence. If the rental income is no more than £7,500, rent-a-room relief applies automatically, and the income is exempt from tax. If the rent exceeds £7,500, the landlord can either deduct £7,500 from the rent or opt to deduct qualifying property expenses.
Property Allowance: A property allowance of £1,000 per tax year is available in relation to property income. If the income does not exceed £1,000, it is not subject to tax. If it exceeds £1,000, the landlord has the option to either deduct actual property expenses from the property income or claim the £1,000 property allowance.
Speak to an Expert
If you would like further information on the taxation of property income and want to find out if you can benefit from available exemptions and allowances, please reach out to our tax team.
Authored by: London Team
