There has long been a thriving residential lettings market in the UK. There are career landlords letting whole portfolios, families running furnished holiday homes and people who accidentally acquire a second property, say through inheritance, for which the obvious thing to do is let it out.
Add to that the phenomenon of Airbnb, which saw its UK listings rise from 76,000 to 257,000 between 2017 and 2020, and it’s clear there are a lot of people generating income and capital gains from rental properties. But do they understand the tax landscape – the liabilities and the allowances?
Here are some top property tax tips to help you get it right.
Tip one – The basics: understand that rental income is subject to income tax
Rental income is added on to any other income, for instance from employment, and subject to income tax at your marginal rate.
If it all adds up to less than £12,570 it is covered by your personal allowance and no tax is due. If it exceeds this, some of it could be taxed at the basic rate (20%), higher rate (40%) or the additional rate (45%).
Tip two – Make use of allowable deductions.
If you have been renting property for some time, you’ll probably be aware that it’s not the full rental income that is taxed.
HMRC permits you to deduct expenses which are wholly and exclusively for the purposes of renting out the property. This includes things like:
- repairs and maintenance (but not capital improvements)
- service charges such as those made by accountants and lettings agents
- insurance
- any utilities you pay for.
If there is a mortgage on the property you can claim a basic rate tax credit against the interest element of the repayments, at 20%.
Tip three – Check if you can claim any tax allowances
As well as deductions, there may be tax allowances which reduce or eliminate the tax you pay.
We have already touched on the £12,570 personal allowance which everyone receives. There is also a property allowance of £1,000 which you can claim for. But the catch with this is: if you claim this, you cannot claim for the deductions outlined in tip two. So you need to weigh up which is best for you.
The rent a room scheme is available for individuals or couples who rent out a room in a house in which they live. It is more generous than the property allowance, allowing for £7,500 of tax-free rental income (or £3,750 each if a couple).
Depending on the nature of your property, you may consider the furnished holiday let scheme. This treats your personally owned holiday home as a business and provides tax advantages, including:
- Being entitled to capital allowances on items purchased to increase the rental income of the property (such as furniture, equipment and fixtures, and including major improvements like a new kitchen).
- Favourable capital gains tax treatment when you dispose of the property.
- Small business rate relief to help with council tax.
- The ability to split your tax liability with a partner to better manage it, and use the income to make tax-advantaged pension contributions.
This is all very attractive but there are a series of technical tests which the property needs to pass in order for it to qualify. Some people may find these onerous.
Tip four – Don’t forget about capital gains tax when you dispose of a property
Primary residences are protected from capital gains tax, but rental properties do come into its scope.
Each person has a £12,300 allowance each year, and as the name suggests, only the gain made (not the whole value) is taxed. However, the CGT rates for property are higher than for other assets, being 18% and 28% for basic and higher rate taxpayers respectively.
One point that could catch some out is that new rules introduced in 2020 bring forward when this tax is payable. You must now pay any CGT due within 60 days of a property disposal.
Help with property tax
As you can see, there is some complexity to getting property tax correct. With so many people new to it since joining the Airbnb revolution, it’s important to understand that any of the above could apply to these properties too.
If you would like help getting it right and claiming all the relevant allowances, please contact our team.
