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November 4th 2013 / BY: Wisteria

Tax Advisers advice on Taxation on Rental Income

If you receive rental income from a UK property, under UK tax law, the rental income received could be liable to tax. The following article will shed some light on how property income is assessed in the UK and the various reliefs/deductions that you are entitled to as a landlord.

In the UK, the method of assessment on any rental income received is on an accruals basis. This means that even if your tenants fail to fully pay for rent, you will be assessed on the rental income that you were due to receive throughout the tax year. If you own multiple properties, then your total property income is pooled together and is deemed as a ‘single business’.

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From the rental income you receive, you are allowed to deduct certain expenses which are wholly and exclusively incurred for the purpose of that property. Again these are deducted on an accruals basis. These include:

–         Genuine repair and maintenance expenditure

–         Any loan/overdraft interest

–         Capital expenditure (but this must not include an element of improvement)

If you decide to rent out a property furnished, you could be entitled to claim a wear and tear allowance against the total rental income you receive. This will mean the total amount of rental income liable to taxation is reduced. The way in which this allowance is calculated is by taking 10% of (total rental income – water rates – council tax).

Note: the water rates and council tax must be paid by you (the landlord).

If you decide to rent out a room in your main residence to a lodger, you can opt to be assessed under the rent-a-room scheme. Under this scheme, if the gross annual receipts are below £4,250, then all of the income received will be exempt from UK income tax. If your annual gross rent receivable exceeds this limit, then you can elect to be assessed either:

1)      On the rent received in excess of £4,250 with no relief for any expenditure, or

2)      Assessed on the total rental income received with normal property income rules applying and the option to claim the wear and tear allowance.

If you incur property losses during a tax year, then you are entitled to carry forward the loss to be offset against future property income. There are certain circumstances which you are unable to do this but tax advisers will be able to provide advice on your loss relief options.

If you would like more information about how property income is liable to income tax then please contact Wisteria on 020 8952 0140 or email info@wisteria.co.uk where one of our tax advisers will be more than happy to assist.