Building up a let property portfolio can provide a valuable source of income, either as a full-time business or to generate additional earnings to supplement a salary or pension.
If you’re new to property letting, a good place to begin is by seeking professional accountancy advice and Milsted Langdon Chartered Accountants in Bath, Bristol, London, Taunton and Yeovil can provide expert support to assist you in maximising the tax efficiency of your let property.
When you start letting a residential property, you must tell HMRC and report property rental income of more than £2,500 a year on your tax return. If the income is less than £2,500 a year, you need to complete HMRC’s form P810.
The amount on which you pay tax is the net rental income for each tax year, made up of the actual (gross) rent in the year, minus allowable expenses related to the day-to-day running of the property, including:
- letting agents’ fees
- accountants’ fees
- buildings and contents insurance
- maintenance and repairs
- utility bills, like gas, water and electricity
- rent, ground rent, service charges
- council tax
- services you pay for, like cleaning or gardening
- other costs involved in letting the property, e.g. phone calls or advertising.
If you let a furnished residential property, you can also claim ten per cent of the net rent as a wear and tear allowance for any furniture and equipment you provide. However, from April 2016, the government intends that they instead be required to deduct the actual cost of replacing furnishings from pre-tax earnings.
HMRC does not normally regard a repair as an improvement when more modern materials are used, e.g. when single glazed windows are replaced by double glazing. However, if you decided to convert the loft of a property as part of replacing the roof, that would be seen as an improvement. Income tax relief is not usually allowed for improvement costs – these instead may qualify for a CGT deduction when the property is sold.
If you make a loss on letting out a property, you can carry this forward to a later year and offset it against future letting profits. If you let out more than one property, a loss for a year on one property can be set against a profit on another.
Interest on a mortgage or other loan you take in relation to property letting is an allowable deduction for tax purposes and interest may sometimes be deductible on loans secured on other assets, if the purpose related to your letting business. This includes the interest on any loan up to the value of the property when it was first let, if higher than the original cost.
However, from April 2017 the rate of tax relief on mortgage interest relief for residential will be limited to the 20 per cent basic rate of income tax, with the new arrangement phased in over four years.