When renting out a property, the tax treatment depends on the kind of property you are renting out.
The rules are different for; Residential properties, furnished residential lettings, furnished holiday lettings and commercial properties.
When renting out a property you or your company must pay tax on the profits made after allowable expenses have been deducted.
What can be classed as an allowable expenses?
HMRC will allow you to deduct the cost of the following from your rental income;
- Letting agents’ fees
- Legal fees for lets of a year or less, or for renewing a lease for less than 50 years
- Accountants’ fees
- Buildings and contents insurance
- Interest on property loans *see proposed changes section below
- Maintenance and repairs to the property (but not improvements)
- Utility bills, like gas, water and electricity
- Rent, ground rent, service charges
- Council Tax
- Services you pay for, like cleaning or gardening
- Other direct costs of letting the property, like phone calls, stationery and advertising
Furnished residential lettings
If the property you are renting is fully furnished you can also claim a ‘wear and tear allowance’. The wear & tear allowance is designed to give a landlord tax relief for the cost of providing furniture and equipment provided with a furnished residential letting. Landlords who rent out properties that are unfurnished (or partly furnished) cannot claim any tax relief for the cost of replacing items such as cookers, fridges, dishwashers and so on. Wear and tear allowance is calculated as 10% of rent less council tax and water rates, for example;
|10% Wear & Tear||£10,500|
Note that allowable expenses don’t include ‘capital expenditure’ – like buying a property or renovating it beyond repairs.
Furnished holiday lettings
For furnished holiday homes, you may be able to claim:
- Plant and machinery capital allowances on furniture, furnishings, etc. in the let property, as well as on equipment used outside the property (like vans and tools)
- Capital Gains Tax reliefs – Business Asset Rollover Relief, Entrepreneurs’ Relief, relief for gifts of business assets and relief for loans to traders
You can only claim these if all the following apply:
- The property is offered to let for at least 210 days a year
- It’s let for more than 105 days a year
- No single let is more than 31 days
- You charge the going rate for similar properties in the area (‘market value’)
If you own the property personally, your profits count as earnings for pension purposes.
The tax treatment of commercial properties is similar to unfurnished residential property as outlined above. However, you can also claim plant and machinery capital allowances on some items if you rent out a commercial property – like a shop, garage or lock-up.
For more information on taxation of property income, you can download our guide for free, call us or fix a meeting!