Property Rental Income for Individuals
UK Rents and licence’s are regarded as UK land and property. Land and property income is all income deriving from such property as if it were a trade. Therefore this is calculated as all income being assessed in the tax year on an “accruals” basis. This means that income is taxed on an “arising” basis in the year of assessment, i.e. income that is due in the year, and not necessary income that is actually paid by the tenant.
For example if a tenant per the tenancy agreement is obliged to pay £495 a month, the taxable income is £5,940 a year, irrespective of the fact the tenant might say pay late for their rent.
Since rental income is an assessment like trade, all income from the different rental properties are pooled together, creating one income stream. Hence profits and losses of the same UK properties are amalgamated together to create the net profit or loss. In essence losses from one property is netted off against profits of the other.
If they are losses overall after pooling all the properties together, then these losses can be carried forward against future profits of property income. These losses cannot be set off against other income, e.g. employment income or self employed income. However, if losses arise due to “capital allowances” this may then be relieved against other general income.
Capital allowances is the allowable decrease in value of the assets each year that are used in the properties. For e.g. fridges and ovens. Capital allowance rates will be 20% or 25% a year depending on current capital allowance rates.
Expenses are allowed to be deducted if they are incurred “wholly and exclusively” for the purposes of the property.
The treatment for limited companies broadly follows the same rules as for UK individuals.
Income from Overseas Property for UK Residents and Domicile
A UK resident or domiciled person will be taxed on income arising on overseas property and hence must be declared on the UK self assessment return. A tax credit may be given dependant on double taxation treaties for tax suffered in the overseas country on that rental income.
On the other hand, non-resident individuals will not be taxed on overseas property income in the UK. Non domiciled individuals will also not be assessed on this income, but only assessed on a “remittance basis”, whereby the income is only taxed if it is brought in the UK.
Recent rules affecting non-domicile individuals that have been resident in the UK for 7 years or more may have to pay tax on there overseas income, unless they choose to pay an annual tax charge of £30,000, if they wish to adopt the remittance basis in the future.
Income from properties overseas is treated like a separate business to that of income arising from UK properties. Hence losses for overseas properties can only be offset against profits from overseas properties arising in the future and cannot be offset against UK property income.
Rent a Room Relief
This is a relief is given for renting a room in one’s main residence. This relief is not available for a property that is not occupied by the owner as their main residence, and hence fully let properties are not eligible for this relief. However, lease holders whose name is on the lease, can claim this allowance for their lodgers, providing of course the lease allows them to take on lodgers.
The relief is not available for commercial lets of the property i.e. home as office, or letting part of the property to a company.
Relief is given up to £4,250 per tax year. Rents from lodgers at or below this amount is not taxable. This is a total allowance for the property is not apportioned per room. If income is received over and above the rent a room relief, then the amount above is taxable, and is declarable in the self assessment return.
The advantage of the rent a room relief is that it does not affect the principal private residence relief when coming to sell the property. If the property was let outside this allowance, and actual rental income and costs were declared in the normal way, then that element of the property being rented would not be exempt for capital gains tax, and hence capital gains tax would be chargeable on that apportionment of the property. Letting relief however may be available up to a maximum of £40,000.