Furnished Holiday lettings, which are treated as a trade - earned income.
Apart from these exceptions all rental income is treated as unearned (investment) income under Schedule "A" regardless of:
• Whether the property is furnished or not
• Whether it is the landlords or the tenants who are responsible for repairs
• Whether this is just one letting or several
In calculating property tax all income is aggregated, which means a loss from one property may be offset against a profit from another property in the same year.
Losses on rental income may also be carried forward against future profits, but this must be offset against the next available profits.
Taxable income for a Schedule A business is assessed on a current fiscal year basis, i.e., from 6th April to 5th April unless the lettings business can be shown to constitute a trade, in which case the trading basis period is used.
Where the rental income is below £15,000 p.a. the accounts can be prepared on a cash basis and only total income and expense figures are required on the tax return, as opposed to a detailed schedule.
Where the rental income is greater than £15,000 p.a. however, income is calculated on an accounting (accruals) basis - rent due but not necessarily received is the basis of the tax charge. Also detailed expenses schedules are required.
Although property income is regarded as investment income (unearned), normal accounting rules for calculating trading profit will apply, so certain operating expenses can be claimed.
Redecoration and operating repairs are allowed expenditure, but development costs and improvements are not - these latter are classed as capital expenditure.
Expenses must be "wholly and exclusively" for the purpose of the lettings business. Typical allowable expenses would be:
• Insurance
• Rates
• Rent Payable
• Administration Costs
• Management Costs
• Loan Interest
You must tell HM Revenue and Customs about your property income by January 31st in the year following the year in which it first arose. If, after doing your accounts the taxable profit is less than £2,500, and you are employed, you may notify HMRC by letter and they can collect the tax through the PAYE scheme.
Otherwise you must complete the property pages (SA105) for UK property and the Foreign pages (SA 106) for income arising on foreign property. If you have not previously completed a SA100 Tax Return you will now need to do so.
It's very important to pre-plan and consider the long-term tax effects of your actions when investing in, developing, letting and disposing of properties.
Good planning can make a big difference to your overall returns but taxation is a complex area and effective tax planning needs expert help.
Page content supplied by: Maurice Patry FCA of www.landlordstax.co.uk
