UK Landlords Tax Return

Yes. If you are in receipt of property income of £10,000 or more (before deducting allowable expenses), you are required by law to file a self-assessed tax return.
In other cases, HMRC should make an adjustment to your PAYE code to collect any tax due on such income. For more information about self-assessment or PAYE, check out the respective sections on our website.

Property income is income which comes from a property which is purely owned to generate revenue. Such properties include those which generate rent, such as houses and flats, land which generates revenue from hobbies carried out on it, such as an archery club or river for fishing or, if you are a UK-resident landlord, any overseas properties which generate revenue.

Income received from non UK properties, will be exempt from UK tax.

If a tenant living in the UK rents a property from a landlord who lives outside the UK, the landlord will still pay UK tax on the rental income even if he / she doesn't live there because the property is situated in the UK.

For both UK and foreign properties – these work on a ‘rents receivable less expenses payable’ basis.‘Receivable' means the rents that relate to a tax year, which is not necessarily the same as cash physically received.

From rents receivable you deduct any allowable expenses payable. ‘Payable' means expenses that relate to the tax year. This may not necessarily be equal to cash physically spent.

These are expenses which are deductible from rents only if those expenses are incurred ‘wholly and exclusively' for the business of letting. Examples of deductible expenses will include agent fees, commissions and genuine repair expenses. For example, if a tenant breaks a window and you repair that window this is a genuine repair and the cost can be deducted from rent.

Any water charges or council tax paid by a landlord are deductible expenses, as is any interest paid on a loan taken out to purchase the property in the first place. Insurance premiums are also deductible.

Any expenditure of a capital nature cannot be deductible from rents – i.e. any expenditure that improves or enhances the value of the property.

E.g. if instead of simply repairing some broken roof tiles, a landlord takes the opportunity to replace his whole roof, there is obviously some degree of improvement here and the costs will not be deductible.

However, capital allowances (essentially depreciation tax relief) may be able to be claimed in respect of capital expenditure used in the rental business. For example capital allowances can be claimed in respect of tools such as ladders and lawnmowers which are used in the property business.

A wear and tear allowance can be claimed in respect of furnished lettings. Basically, a deduction of 10% of the relevant rental amount is taken when calculating the profits of the property business. If a landlord does not want to claim wear and tear, there is an alternative called the renewals basis – which means that the landlord cannot claim a deduction for the initial costs of any furniture he buys, but when the furniture is replaced, the costs of replacements can be included as allowable expenses.

Where wear and tear allowance is claimed no other relief is available in respect of expenditure incurred on furniture and furnishings etc. Landlords must either adopt one basis or another – they cannot change between wear and tear and the renewals basis when it suits them

Where expenses exceed income, a property business loss will arise. If you have several sources of UK property income, all profits and losses in the year are pooled together for these purposes to give an overall profit or loss for the year. If a taxpayer has a property business loss, that loss can only be carried forward and set against property income from a UK property business in future tax years. It cannot be set against non- rental income nor can it be carried back to a previous year.

You should note that an overseas property loss, eg a loss on a villa in Spain, cannot be set off against UK property business income. This also applies the other way around so there is never any mixing of UK and overseas property business profits and losses. If you have an overseas property business loss, that loss can only be carried forward and set against future overseas property business income.

A Furnished Holiday Let is a special type of property that can benefit from certain tax advantages.

If a landlord is letting out a room to a tenant in his home (i.e. his only or main residence) a special relief is available. Note here that the landlord and tenant will be living in the same property, so the tenant is a ‘lodger' of the landlord.
If the tenant pays the landlord a rent of say, £50 a week, this is strictly chargeable to tax as property income. However, where gross rents are not more than £4,250 a year, rent-a-room relief can apply and the rental income is exempt from tax.

HMRC has had difficulty in persuading taxpayers who live abroad to pay their tax bill on their UK rental income, so what they ask the tenant or letting agent to do is withhold basic rate tax from the rent paid. For example, if a landlord charges a tenant £1,000 a month to live in a UK property, he will receive £800 of this and £200 will be sent to HMRC. This is HMRC's way of getting some tax in, in the event that the non-resident landlord decides to ignore his UK tax obligations.
If the non resident landlord prefers, he or she can make an application to HMRC to receive this rental income gross. HMRC will agree to this if the non-resident landlord promises to file a self-assessment tax return and pay his income tax in the normal way. If the landlord has a good record and is up to date with his obligations etc, HMRC will agree to him receiving his rents gross. Contact us for further information on this.