Taxation of Property Income – I have recently purchased a second home and have let it to tenants; do I need to declare my rental income and what might I have to pay?
As a UK resident with rental income you most certainly do need to declare your rental income. There are severe penalties for not declaring rental income. You also need to declare your income if you receive rental income from properties abroad.
In practice, because you can claim expenses including mortgage interest relief against your rental income, many people don’t pay any tax in the early years of letting because they probably make a small loss on the project.
If you have always been an employed person and do not normally submit a self-assessment tax return you will now need to start submitting one – contact your local tax office to inform them about your rental income. You have until 5th October in the tax year following your aquisition and income from property to declare.
Income from property is classed as investment or “unearned” income but under schedule A tax rules expenses are allowable as though the letting were a trade or business, so long as these expenses are incurred ‘wholly and exclusively’ for the rental “business”. Allowable expenses include interest on loans, agents fees, insurance, repairs etc.
You can claim expenses that are allowable against income each year on your self assessment tax return, but you cannot claim costs which are deemed to be capital expenditure or improvements. For example, you cannot claim for furniture, fixtures and fittings, but you can opt to claim for replacements on either a renewals basis or a 10% of annual rent “wear & tear” allowance. Repairs can be claimed for, but not improvements. One exception here might be the replacement of single glazing with double.
If your lettings, after allowable expenses, make a loss in the early years (very likely) you can offset these (pool them) against other rental income (not earned income) or roll them forward to following years.
For those with lodgers in their own homes the rent-a-room allowance (which has not increased in over 10 years) is £4,250. If you are letting furnished holiday accommodation and comply with all the rules this is treated as a full business or trade. Income is treated as earned and can be used for pension contributions. Losses can be set-off against other earned income and any capital gains on disposal or funds transfered to holiday lets from any another business sale can qualify for roll-over relief.
If you receive income from property you let abroad it is calculated in a similar way to UK based lettings but comes under tax schedule D Case V and the holiday lettings rules don’t then apply. If you live abroad and earn rental income in the UK there are special taxation schemes (see IR140 below) where income tax is deducted at the basic rate at source either by the letting agent or by the tenants and paid direct to HMRC.
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