Property Tax in the UK – What You Need to Know
If you have bought a residential property in the UK and intend letting it out then it is very likely you will have to declare your income from and state the expenses incurred on the property on your Self-Assessment Tax Return. There are some exceptions but most people will fall into this category so it is essential you know about property tax.
If the property is owned jointly by 2 people, for instance a married couple, then it is assumed the income will be divided equally between the joint owners. If you do not want the income to be treated as a 50-50 split then the owners need to be registered as tenants in common for their propety tax to be handled differently. This requires a declaration of trust to be drawn up and a form submitted in advance to HMRC (Declaration of beneficial interests in joint property and income – form 17).
If you think it might be financially beneficial to divide the income unevenly, such as where one partner does not work or earns significantly less than the other, then ask an accountant for advice.
On the whole, the income side of letting out a property, however, is relatively simple compared to the expenses. What can and cannot be claimed as expenses on a rental property is fairly complicated.
Expenses that can be claimed against property tax
So just what can landlords deduct for replacement fixtures and furnishings? The most common expenses that can be offset against rental property income are:
- Mortgage interest
- Wear and tear
Only the interest on a mortgage can be offset against tax not the capital repayments. It is, therefore, important that you can clearly show what the interest amounts are and what the repayment amounts are if the mortgage taken out is on a repayment basis. In addition, interest on loans to improve the property can be claimed against rental income.
Interest on re-mortgages can also be reclaimed but only up to the original purchase price of the property. However, for landlords with more than one rental property it is worth bearing in mind that the total equity of the whole portfolio can be used when deciding whether the threshold has been reached.
Other mortgage-related expenses are also claimable; for instance lenders charges, arrangement fees and survey fees.
Wear and tear
There is a wear and tear allowance that can be used to offset tax on rental income, which is currently set at 10% of the rental income. This allowance is intended to cover the cost of repairing or replacing furniture and appliances so clearly these cannot be treated as additional expenses. The wear and tear allowance should also be used for replacing carpets and flooring.
It is important to be clear about what is classified as a repair and what is classified as an improvement. Repairs can be offset against property income but improvements cannot, although they can be offset against capital gains tax if the property is subsequently sold.
Examples of repairs could be:
- Treating damp
- Fixing a broken window
- Replacing roof tiles
- Repairing gutters
Examples of improvements are changes that add to the value of the property, such as:
- an extension
- a conservatory
- adding a shower room
However, with some changes it is difficult to say whether they are repairs or improvements, for instance a replacement kitchen or double-glazed windows. Replacements which you want treated as a repair for tax purposes should always be on a like-for-like basis. This is clearly difficult if a kitchen was very dated but equivalent modern materials are allowed. What is not allowed is for an old, basic kitchen to be replaced with a top of the range, high technology kitchen.
Some improvement can benefit from up to £1,500 via the Landlords Energy-Saving Allowance for improvements such as loft insulation and cavity wall insulation.
The rules covering situations such as these are complex so always seek professional tax advice from an accountant when completing your self-assessment tax return if you own property that you let out.