Property

Letting Property

Profits from rentals are subject to Income Tax at your marginal rate of tax.

Expenses incurred wholly in connection with the rental business are deductible when calculating net taxable profits, providing they are not capital in nature.

Finance Cost Restriction

Tax relief on finance costs for individuals and partnerships that let residential properties has been withdrawn, and now relief for finance costs is only provided as a basic rate tax reduction.

This effectively means that only basic rate tax taxpayers can obtain full relief for these types of costs – other taxpayers suffer additional tax.

The rules for determining whether an expense is capital or revenue in nature are not always straightforward.

Capital Gains Tax (CGT) – payable in 60 days

Individuals, trustees and personal representatives are required to report and pay CGT on the disposal of UK residential properties within 60 days of completion of the sale, as from 27 October 2021.

In addition, non-residents are also required to report and pay CGT on disposals of commercial property within the same time limits.

Where properties are held jointly or in partnership, each owner is required to submit a return (and pay the tax) in respect of their share of the disposal. Penalties will apply if the return is filed late.

The amount to pay is based on an estimate of the tax payable. This will be treated as a “payment on account” against your total Income Tax and CGT liability for the tax year for which your annual self-assessment tax return is submitted.

H M Revenue & Customs has created a facility where you can report the disposal and pay the tax by creating a ‘Capital Gains Tax on UK property account’.

There are exceptions where the gain is covered by losses or your annual exemption for the year of disposal.

Stamp Duty Land Tax (SDLT)

SDLT is payable on property transactions by the purchaser and is calculated based on the consideration.

From 23 September 2022, the rates are as follows:

Residential property rates. Property or lease premium or transfer value	SDLT rate
Up to £250,000	0%
£250,001 to £925,000	5%
£925,001 to £1,500,000	10%
Over £1,500,000	12%

A surcharge of 3% applies to: individuals who already own residential property; limited companies; and trusts.

There are reliefs from the surcharge in limited circumstances.

Different rates apply for first time buyers if purchasing a property for £625,000 or less; the nil rate band applies up to £425,000

Non-residential property rates. Property or lease premium or transfer value	SDLT rate
Up to £150,000	0%
£150,001 to £250,000	2%
Over £250,000	5%

There are different bands and rates in Scotland.

PRR provides full or partial relief on the gain on the sale of a property where you have occupied it as your principal private residence at some point during ownership.

The relief is only attributable to gains for periods during ownership where it was used as your main residence.

Where a property has been your main residence, the last 9 months of ownership before the sale is treated as qualifying for PRR regardless of whether it is actually occupied as such.

Relief is also available for periods in which your main residence is let, but this only applies where the property is occupied by you and let to a lodger.

Furnished Holiday Letting (FHL)

There are special tax rules for rental income from properties that qualify as FHL.

If you let properties that
qualify as FHLs:

you can claim Capital Gains Tax reliefs for traders (Business Asset Rollover Relief, Business Asset Disposal Relief, and relief for gifts of business assets) and Income Tax relief on loans to traders;
you are entitled to claim Plant and Machinery capital allowances for items such as furniture, equipment and fixtures;
the profits count as earnings for pension purposes.

To be classed as a FHL the lettings must constitute ‘the commercial letting of furnished holiday accommodation’ in the UK or in the European Economic Area (EEA), as well as the following additional conditions:

‘the availability condition’ - the accommodation must be available for commercial letting to the public generally as holiday accommodation for a minimum of 210 days during the tax year;
‘the letting condition’ - the accommodation must actually be commercially let as holiday accommodation for a minimum of 105 days during the tax year (ignoring ‘periods of longer term occupation’); and
‘pattern of occupation condition’ - during the tax year, there must not be more than 155 days falling in ‘periods of longer term occupation’. A ‘period of longer term occupation’ is a continuous period of more than 31 days during which the accommodation is in the same occupation.

VAT
Where property is let as ‘holiday accommodation’, which includes both FHL and other types of holiday letting, the income is a ‘taxable supply’ for VAT purposes. Care is therefore needed to ensure that you comply with the VAT legislation - currently the threshold for compulsory VAT registration is £85,000 of ‘taxable supplies’ in any 12 month period. You may need to consider the value of your holiday accommodation income in conjunction with other income that you may have where that income also qualifies as a ‘taxable supply’.

Annual Tax on Enveloped Dwellings (ATED) - where residential property is not owned personally

ATED is a tax charge on companies, and on Limited Liability Partnerships which have a corporate member, that own UK residential property valued at more than £500,000.

The tax charge varies depending on the value of the property held.

Returns must be filed and the tax paid at the beginning of the relevant tax year, by 30 April. If the property is disposed of during the tax year then a claim for a refund can be made.

There are several reliefs from the ATED regime which can be claimed in certain circumstances including, those applying to property developments and properties let to third parties on a commercial basis.

A change in use of a property may mean you will need to file an amended ATED return.

Private Residence Relief (PRR)

Tax Tip | Buying new properties through a limited company
Buying new properties through a limited company (potentially combined with the use of a Family Investment Company), particularly where the intention is to build a long-term investment portfolio, can be tax efficient as it avoids the finance cost restriction and can have other benefits.

Tax Tip | Transferring existing properties to a limited company
This can trigger an immediate charge to SDLT and CGT, and may require the cooperation of any lenders involved, therefore it requires careful consideration and planning.