Updated 7 September 2020

Cash basis

Since 6 April 2017 HMRC has expected individual landlords with gross rents of under £150,000 a year to declare their rental income on the cash basis, unless they elect annually in their tax return to use the accruals basis. The cash basis entails reporting simply the income received and expenses paid in the period, irrespective of the period to which they relate. This means that if a tenant pays a month’s rent in the tax year after that in which it was due, the landlord has to declare 11 months’ rent in the first year and 13 months in the second.

Finance charges

Except in respect of furnished holiday accommodation, tax relief for loan interest on residential property is supposed to be restricted to the 20% basic rate. The restriction has been phased in:

• for 2017/18 it applied to a quarter of such costs
• then half the costs for 2018/19
• then three quarters for 2019/20
• from 6 April 2020 it applies to the whole cost

It is intended to work by replacing a deduction for the relevant proportion of the finance costs by a tax credit of 20% of that amount. This credit is not always effective. For example, because the interest is not deducted from the rent, a landlord may then have a ‘high income child benefit charge’ or have their personal allowance reduced because their income then exceeds £100,000.

Finance charges – cash basis

Where rental income is calculated on the cash basis, there can be a further restriction of the relief for finance costs in relation to residential and commercial property. Tax-deductible finance costs are restricted if the loans outstanding at the ‘end time’ – generally the end of the tax year – exceed the value of the properties when first acquired.

Other expenses

Income tax relief is available for other revenue expenses – repairs and maintenance, insurance, agents’ commission, etc – but is limited for capital expenditure. The cost of replacing ‘domestic items’ on a like-for-like basis in a dwelling house is tax-deductible, unless the property is let as part of a furnished holiday letting business (which have their own rules) or if ‘rent-a-room relief’ applies (see below for more on this).

Domestic items include furniture, furnishings, household appliances and kitchenware, but do not include fixtures, such as a boiler or radiators. For non-residential property, capital allowances are available on the cost of ‘plant and machinery’, integral features, thermal insulation and security features.

Lease premiums

If a lease for 50 years or less is granted for a premium, with or without a rent in addition, part of the premium will be treated as representing a part disposal for capital gains tax (CGT) purposes, and part will be treated as rent subject to income tax. The proportion depends on the length of the lease.

Rent-a-room relief

This is available where income is derived from letting furnished accommodation within the landlord’s only or main residence. If annual gross rents are no more than £7,500, they are exempt. If they exceed £7,500 a landlord may choose either to calculate profit or loss in the usual way or elect to be taxed on the excess of gross rents over £7,500. The figure of £7,500 is ‘shared’ between those who get income from the same property.

Property allowance

If property rent does not exceed £1,000 a year, the income is exempt from tax, but no tax relief is given for associated expenses. If income or receipts exceed £1,000, the landlord may claim to be taxed only on the excess, but again with no tax relief given for associated expenses.

Furnished holiday lettings

The commercial letting of furnished holiday accommodation is defined at length in the legislation. Where it qualifies, it is taxed as though it were a trade. Among other things this means that the finance charge restrictions mentioned above for residential property do not apply. Detailed notes are available here.

Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary. If you would like advice or further information, please speak to your usual Shipleys contact.

Copyright © Shipleys LLP 2020