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This page is meant as a brief introduction to the tax position of landlords in this country. Before you enter into a property investment, it is vital to gain expert advice with regards to your own tax position from an accountant or a specialist financial adviser. An accountant is usually the best option. They will be able to advise you more fully on your tax position and any other aspects of your financial affairs that affect your tax liability.
UK income tax is payable on the net income from a let property
if the property is in the UK . This is the case regardless of
the residence or tax status of the landlord. If you continue to
live in the UK whilst your property is let, you should declare
your rental income in the normal way on your tax return.
Rental income is subject to income tax at the marginal rate. This is the same as the highest rate of tax which applies to you - usually 23% or 40%, depending on whether your total earnings are higher than £28,000 per annum.
Married couples should ensure the most efficient split of letting income between husband and wife, so as to maximise personal allowances and minimise the highest taxable income.
The net income on which you are taxed is the gross income less
certain expenses incurred in the letting and management of the
property. You can set certain things against the rental income
for tax purposes. Most business expenses that are invoked through
renting out your property, such as legal and professional fees,
maintaining or replacing fixtures, furnishings and fittings, and
redecorating are classed as deductible expenses.
Only those expenses incurred "wholly and exclusively" for the purpose of letting or managing the property can be offset against your letting income. The most common ones are:
The sale of an individual's own home is not normally subject to
capital gains tax, as it falls under the 'principal private residence'
rule. But the 40% capital gains tax would be payable on the sale
of a property held for investment purposes such as letting.
The rules regarding capital gains tax are pretty complicated and you should certainly seek advice when calculating it. For instance, where a property has been both a home to the owner and let out to tenants, no tax is payable on the gain during occupation, but full tax is paid on any gains made during the period of tenant occupation. Another point to note is that the tax is only payable by persons who are resident in the UK at any point in the year of disposal.
Residential rent is at present exempt from VAT and is likely to
remain so.
From 6 April 1996, all taxpayers have been required to keep tax
records of all purchases and receipts under the Self-Assessment
system. You are required to keep the records for five years.
You should diligently keep a record of all your income and expenditure that relates to you rental property. The records should show to whom payments have been made and from whom income has been received, with receipts kept for all expenditure. Retain invoices for sundry expenses paid, such as rates and ground rate, as well as interest statements from lenders. Also keep invoices for work incurred during or between lettings, and ensure that the nature of the work is clearly stipulated on the invoices.
Finally, use a good inventory. This may avert a dispute with the inland revenue over replacement costs.
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