EXPERTS ON PROPERTY TAX

Introduction

An individual’s income from property is charged to income tax in accordance with the rules of the Income Tax Act 2005.

Things you should know

  • Income tax is charged on the profits of a business which is carried on for generating income from land situated in the UK.
  • Expenditure which is incurred wholly and exclusively for the purposes of trading of a property business is deducted from Rental income when calculating net property income.
  • The government are increasingly restricting expenditure relief on second homes and/or buy to let properties to open the property market to first time buyers.

Allowable Property expenditure rules.

Expenditure which is incurred wholly and exclusively for the purposes of property business is deducted when computing property income.
The types of expenditure which are likely to be deductible when computing property income include the following:

  • Repairs and maintenance to property (excluding improvements)
  • Insurance of the property and/or its contents
  • The cost of providing services to tenants
  • Administrative and management costs, including bad debts incurred
  • Rent paid to superior landlord (if the property is sub-let)
  • Business rates, water rates or council tax (which is the legal responsibility of the occupier of premises, not the owner, but may be paid by a landlord on behalf of a tenant and then recouped via an increased rent)
  • Interest paid on loan to buy or improve the property concerned
  • Advertising or promotional costs involving the property.
  • Legal fees (but not all ) and Accountancy fees.
  • License fees or certificates. Such as a Gas Safety certificiate.
  • Plant and Machinery which is used in the repair, maintenance or management of the let property. These are known as capital allowances.
  • Mortgage interest and finance charges have been wholly allowable however recent legislation has reduced the allowable limit to basic rate and it is the intention to reduce further in prospective tax years

If a property is partly let and partly owner-occupied, it is necessary to apportion the expenditure accordingly.
When a taxpayer derives income from two or more properties it is not necessary to calculate the amount of profit (or loss) arising on each property individually.

Losses

If a taxpayer’s gross property income for a tax year is exceeded by the allowable expenditure, then the taxpayer has incurred a loss and taxable property income for the year is £nil. The loss is carried forward and relieved against the first available property income arising in subsequent tax years. Strictly speaking, relief is given by deduction from the taxpayers’ total income, but the amount of relief is given by deduction from the taxpayers’ total income but the amount of relief given is any tax year cannot exceed the property income for that year.
Any loss incurred on an individual property in a tax year will automatically be set against profits arising on other properties in the same year, since property income and expenditure is generally pooled to give an overall profit or loss for the year. .

RENT A ROOM RELIEF

If a taxpayer lets rooms out in his or her main residence and gross annual rents not exceeding a specific limit (£4250 for 2016/2017) are exempt from income tax. However, the taxpayer may elect to ignore this exemption and to apply usual property income rules instead. This may be beneficial if the rents were exceeded by expenses, so that a loss could be claimed. If gross rents for a year exceed the limit, rents less expenses are assessed to income tax in the normal way. However, the taxpayer may elect to be assessed instead on the excess of gross rents over the limit, without deducting expenses of any kind. Any elections must be made by 31st January in the second tax year following the tax year to which it relates.
For  professional tax advice in relation to property tax: call Salford Chartered Accountants on Tel ; 0161-278-2714 for a free consultation without obligation.

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