Landlord Tax
Landlord's Tax Liabilities
This quick guide is designed to help you understand your liabilities and responsibilities as a Landlord in relation to taxation. However we are not accountants so we always recommend seeking professional advice in relation to all tax matters.
The income that you receive from letting property, whether furnished or unfurnished, is generally regarded as unearned income by the Inland Revenue, regardless of your employment status. However you are only liable to pay income tax on the profit generated from letting, after deductions made for ‘allowable expenses’.
What are ‘allowable expenses’?
The general rule as to whether an expense is an allowable deduction from income is to ask the following two questions:
1. Is it an expense of income?
2. Was it incurred ‘wholly and exclusively’ for the purposes of renting the property?
The first question generally rules out any capital expenditure. However, whether this applies to renovations depends on the extent of repair in each particular case. If a property is in a condition suitable for letting when it is acquired then renovations such as redecorating will usually qualify as allowable expenses. However, if a property is acquired at a low cost and requires a great of work before it can be let then it will usually be classed as a capital expenditure and not an allowable expense that can be set against rent received. As a general rule, where there is an element of improvement then such expenditure will be treated as capital. The second question rules out any situation where a landlord benefits personally from the expenditure. For example, decorating materials purchased and used at the landlord’s private home are not an allowable expense.
Whilst you cannot charge for your own time spent collecting rents and managing properties, payments made to others for this purpose (even family members) are allowable expenses if actually performed and recorded. This includes the cost of employing a letting agent such as ourselves.
Examples
The following types of expenditure are usually regarded as ‘allowable expenses’:
- Interest paid on loans taken out to purchase the property.
- Travel expenses incurred by inspecting the property and/or collecting rent.
- The costs of building and contents insurance.
- Maintenance expenses.
- Leasehold expenses (such as ground rent or management company charges).
- Water rates and council tax.
Losses
If expenses and capital allowances for any year are greater than the rental income received then you have suffered a loss on your investment for that year.You are not allowed to set this loss against other forms of income and instead you must carry it forward to set against the profits of future years.
Capital Gains Tax
Capital Gains Tax (CGT) is not usually payable on a private individual’s own home, but is payable on most property that is let. As landlord, your liability for CGT is on the profit made when the property is sold.
You will be exempt from paying CGT if the let property is sold within 3 years of being purchased. If this exemption does not apply, then you will pay CGT for the amount of time that the property was not your ‘principle residence’ (where you actually live).
Reducing CGT Liability:-
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