From Shipshape | Uploaded 3rd August 2018
If you let property a number of changes came in last year that affect the tax payable on your rent.
From 6 April 2017 HMRC expects 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.
Except for in furnished holiday accommodation, tax relief loan interest on residential property is being restricted to the 20% basic rate. This restriction is being phased in – for 2017/18 it applies to a quarter of such costs, half the costs for 2018/19 , three quarters for 2019/20, and from 6 April 2020 it will apply to the whole cost. This will work by replacing a deduction for the relevant proportion of the finance costs by a tax credit of 20% of that amount. This can have other consequences, for example because the interest is not offset against the rent, this may result in an individual having income in the £100,000 to £123,700 band in which the personal allowance is withdrawn
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.
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.
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.
This is available where income is derived from letting furnished accommodation within the landlord’s only or main residence. If 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 don’t apply, as mentioned above.