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 The buy to let market has been booming over recent years with far more interest being taken in the taxation of buy to let properties.
Here are some of the main points to be aware of...
- The income is treated as the profits of a Schedule A Business with income charged to tax for the tax year to 5th April. Although it is an investment and treated as investment income, the general accounting rules for working our trading profits are applied. Allowable expenses are broadly those that are revenue rather than capital and are wholly and exclusively for the purposes of the letting. So for example, an adjustment must be made where there is a private element of the expenses. Interest payable on a loan to acquire the property is allowable.
- Capital allowances are not available on plant and machinery used in dwellings. However, furnished properties can claim a wear and tear allowance of 10% of the net rents in respect of furnishings, etc. Net rents is the rent less any expenditure that would normally be incurred by the tenant, such as heat and light. This is normally the best option although it is possible to claim relief for furnishings and fittings on a renewals basis whereby no relief is given for the original cost but full relief is given for the replacement cost when that occurs.
- The usual rules of capital versus revenue apply to replacement of fixtures such as the boiler. Where a fixture is replaced with a similar fixture this will usually be an allowable deduction but where there is improvement this will usually be capital with no deduction given.
- Landlord's Energy Saving Allowance - landlords that incur capital expenditure up until 5th April 2015 to install loft insulation, cavity wall insulation or floor insulation in residential property may claim a revenue expense of up to £1500 per property.
- After profits and losses of different properties have been pooled together in any one year, any overall loss is normally carried forward to set against later rental income. However, relief is available for excess capital allowances to be set against other income of same and/or following year.
- When the property that is let is situated abroad the calculations are very similar.
- Where the landlord of a UK property is non resident, basic rate tax should normally be deducted at source from the net rental income by the letting agent or by the tenant unless HMRC have agreed that the landlord will complete a self-assessment tax return.
- A distinction should be made for furnished holiday lettings which is broadly treated as trading income for tax purposes and has several advantages. For example, capital allowances are available on plant and machinery, they count as business assets for capital gains taper relief purposes, may in some circumstances be available for inheritance tax business property relief and trading losses can be set off against other income. There are specific rules to be met to qualify for this treatment. It must be available as holiday accommodation for at least 140 days in the tax year and actually let for at least 70 of those days. The accommodation must not normally be let to for a continuous period of more than 31 days during at least 7 months of the year.
How We Can Help You
There is no substitute for specific advice in your own situation when it comes to buy to let property. Please contact us.
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