Help & Advice
Rental &Holiday Lettings
Trading And Property Allowances
What is a Furnished Holiday Letting (FHL)?
The accommodation must be furnished, in the UK or European Economic Area (EEA) and commercially let for certain periods. From April 2012 the minimum period it is available for rental is 210 days and it must be actually let for 105 days in a tax year.
FHL profits are deemed to be investment income on which NIC’s are not payable.
For more information check the Revenue’s website here.
Property Ownership
The usual position is that the same person may be both the legal owner and the beneficial owner however the legal owner can be different from the beneficial owner – a trustee is the legal owner while a beneficiary of the trust may be the beneficial owner.
There are two forms of joint ownership:
Tenants in common. Each person owns their own share of the property and are taxed on that share for both income tax and capital gains tax. On death that share is decided by their will or under the rules of intestacy.
Joint tenants. Each person has an interest in the property. On death the property passes directly to the remaining joint tenant(s).
Unmarried owners
The general rule is that each owner’s share is in according to their ownership of the property. However, the owners don’t have to accept this. If income is shared between owners in a different split to ownership, other than for tax evasion purposes, the tax liability will be the same.
Married couples and civil partners - Joint ownership
Legal ownership. This is effectively the paper title to the property and will be shown at the Land Registry. If the legal ownership of the property is in the name of both spouses, then for income tax purposes any rental income is automatically split 50:50 irrespective of the underlying beneficial ownership percentages. On sale any capital gain is split according to the beneficial ownership ratios.
Beneficial ownership. This is the right of use of the property (i.e. the right to live in it, or to let it out and receive the rental income). The beneficial ownership split can be shown at the Land Registry (but does not have to be). The taxation of rents will normally be 50:50 unless a ‘Declaration of beneficial interests in joint property income’ election, form 17, is filed with HMRC.
Form 17. This allows a married couple to say how the rental income is to be split but any split of such income must be follow the underlying beneficial ownership split. This must be lodged with HMRC within 60 days of its completion to be valid. It must be signed by both husband and wife. Evidence of the beneficial ownership split must also be supplied. Changes must be notified immediately to HMRC.
This declaration is irrelevant where the legal ownership is in the name of one spouse only or where the co-ownership of the property is by any two or more persons who are not married.
Partnership
If a property rental business is operated through a genuine partnership, HMRC will tax each partner on the amount of income as shown in the partnership’s accounts. This means that the split of income can be changed each year if required.
On the eventual disposal of your property you will have to consider the capital gain tax (CGT) consequences. This tax will be levied on the difference between the proceeds/market value and your capital costs. It is therefore prudent to keep a contemporaneous record of these capital transactions. If you can let us have the following details, we will include a memorandum on your annual rental accounts.
1. The dates the property was purchased and cost or the date the property was inherited and the probate value.
2. The expenses of acquisition.
3. Particulars of any capital costs (new kitchen. Bathroom, etc).
4. The dates the property was your principle private residence, if applicable.
Keeping records
It will help you and save our time (and therefore reduce our charges) if you keep good bookkeeping records. The figures to be completed on the property supplement of your Return are usually:
Income – the amount of rent and any income for services provided to tenant.
Expenses
Rent paid, repairs, insurance and costs of services provided.
Loan interest and other financial costs.
Legal, management and other professional fees.
Other allowable property expenses.
Capital outgoings and recent changes
Capital Gains
Keep details of the cost of the property, expenses of purchase and capital outgoings as you may need this information for CGT purposes when the property is disposed of. If we prepare your rental accounts we track this for you.
On the eventual disposal of your property you will have to consider the capital gain tax (CGT) consequences. This tax will be levied on the difference between the proceeds/market value and your capital costs. It is therefore prudent to keep a contemporaneous record of these capital transactions. If you can let us have the following details, we will include a memorandum on your annual rental accounts.
1. The dates the property was purchased and cost or the date the property was inherited and the probate value.
2. The expenses of acquisition.
3. Particulars of any capital costs (new kitchen. Bathroom, etc).
4. The dates the property was your principle private residence, if applicable.
How interest relief is given in your tax calculation.
For 2017/18 the relief is given partly by deduction, 75%, while the balance of 25% is granted by tax credit. This may cause confusion so an example is given below.
Rental accounts.
Rents receivable 20,000
Rates/insurance 500
Maintenance 2,000
Interest 6,000
Professional costs 1,000
Other expenses 500
Total expenses 10,000
Net profit £10,000
On your tax calculation the figure for “Profit from UK land and property” will be increased by 25% of the interest figure – £10,000 plus (£6,000 x 25%) £1,500 = £11,500 and this will form part of your “Total income received” on which tax is calculated. After arriving at a figure for “Income Tax charged” the 25% adjusted for above is then relieved by tax credit at the basic rate band – £1,500 x 20% = £300.
This method of calculation restricts interest relief for higher rate taxpayers.
Replacements Of Domestic Items Relief (RDI).
With effect from 5 April 2016 the old rules on claims for expenditure on expensive items of a long-lasting nature such as household appliances etc. used by their tenants is being replace by “Replacements of Domestic Items Relief” (RDI). All landlords of residential property can claim this (previously the property had to be furnished). The relief is given for the like-for-like replacement cost of domestic items (not the initial cost). You can also continue to claim tax relief for the repairs and renewal of fixed items.
Domestic items are:
- Moveable furniture (beds, free-standing wardrobes, etc.).
- Furnishings (carpets, curtains, linen, etc.).
- Household appliances (televisions, fridges, freezers, etc.).
- Kitchenware (crockery, cutlery, etc.)
You cannot claim RDI for expenditure integral to the property that is not normally removed by the landlord when the property is sold but you can claim for repairs.
- Capital items which becomes part of the house, such as fitted bathroom furniture, baths, toilets, boilers and fitted kitchen units and appliances.
- New Integral features such as a *boiler or radiator which is part of the heating system (again we can still claim of this type of expenditure against any eventual capital gain when the property is sold, so keep full details). Landlords will continue to receive tax relief for the replacement of these items as repairs.
*There is some debate on whether a new boiler or radiator is capital or is a repair to the overall heating system.
The HMRC notes on this can be found here.
Repairs/Capital improvements
It is important to distinguish correctly between repairs, which are deductible from rental income and capital improvement which are treated as part of the base cost for capital gains tax purposes.
The broad difference is that repairs involve placing as asset into the condition that it originally was, whereas capital expenditure involves improving it in some way. Having said that, a cost normally remains revenue where any improvement merely arises because you are using modern materials broadly equivalent to the old ones. For example, replacing wooden single glazed windows with modern UPVC double glazed windows can be classed as revenue. The Revenue accept that expenditure to rectify dilapidations that occurred in a previous ownership is allowable so long as the property was in a usable state when acquired.
Capital gain
Capital Gains Tax is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value.
It’s the gain you make that’s taxed, not the amount of money you receive.
You only have to pay Capital Gains Tax on your overall gains above your tax-free allowance (called the Annual Exempt Amount).
The Capital Gains tax-free allowance is:
£12,300
£6,150 for trusts
https://www.gov.uk/capital-gains-tax/allowancesEntrepreneurs’ Relief (ER)
Pay Capital Gains Tax in 30 days
CGT has normally been payable by 31 January after the end of the tax year in which the contracts are exchanged but for residential sales exchanged on or after 6 April 2020 any CGT due will be payable within 30 days of the completion date.
CGT arising on the disposal of assets other than homes will continue to be payable on 31 January where the seller is a UK resident individual or trustee. There are different rules for individuals who live overseas and for corporate sellers.
As well as paying the CGT due you will have to complete a new online CGT return to report the sale within 30 days. We can submit this on your behalf. This is required in addition to your self-assessment tax return which will have to be completed as normal by 31 January for the previous tax year.
If no CGT is payable on the disposal (for example because the gain is fully covered by the private residence exemption or losses or the annual CGT exemption) then you do not have to file the online CGT return.
In effect you will have to report gains from the sale of residential property twice; first on the online CGT return and then on your self-assessment tax return unless, unusually, the self-assessment return for the period is submitted first. There will be penalties for failing to complete either tax return on time so please tell us as soon as you have agreed to sell a residential property.
Here are some terms you should be aware of
• Testator- a person who has made a will or has given a legacy
• Executor/Executrix/Personal representative (PR) – a person or institution appointed by a testator to carry out the terms of their will.
• Period of administration – This starts the day after the individual dies to the date the residue of the estate is established.
• Residue of the estate – what property of yours is left over after the deduction of specific gifts, debts, legacies, tax and the expenses of administration.
• Probate/Grant of representation – the legal process whereby a will is “proved” in a court and accepted as a valid public document that is the true last testament of the deceased.
• Estate assets – These will usually be the property and investments of the deceased.
• Probate value – The value at the date of death usually established for Inheritance Tax (IHT) purposes.
• Appointment of assets – The transfer of assets from the Personal representatives to the beneficiary. The is no Capital Gain at this point, the beneficiary is deemed to take over the probate value of the asset.
• Beneficiary – person who derives advantage from the will.
• Specific legacy – a gift in a will of a certain article or property to a certain person or persons. Where this is an income producing asset the income is taxed on the beneficiary from the date of death.
• Pecuniary legacy – A gift of money in a will.
• Residuary legacy – it is the legacy that consists of all the money and property that remains after other amounts of money or property is given to others.
Entrepreneurs’ Relief (ER)
This is a Capital Gains Tax (CGT) relief which can be claimed on qualifying business disposals by individuals (not companies). It reduces the rate of CGT on the disposal of assets to 10%. There are anti avoidance rules which apply to the repayment of share capital.
ER can be claimed for disposals of
all or part of your business as a sole trader or business partner – including the business’s assets after it closed,
shares or securities in a company where you have at least 5% of shares and voting rights (known as a ‘personal company’),
shares you got through an Enterprise Management Incentive (EMI) scheme after 5 April 2013,
assets you lent to your business or personal company.
There are anti avoidance restrictions if within two years the individual (or an associate) starts up a similar trade or activity. In these circumstances, the distribution is treated as income.
If you’re selling all or part of your business
Both the following must apply:
you’re a sole trader or business partner,
you’ve owned the business for at least one year before the date you sell it.
The same conditions apply if you’re closing your business instead. You must also dispose of your business assets within 3 years to qualify for relief.
If you’re selling shares or securities
Both the following must apply for at least one year before you sell your shares:
you’re an employee of the company,
the company’s main activities are in trading (rather than non-trading activities like investment) – or it’s the holding company of a trading group.
Either of the following must also apply for at least one year before you sell your shares:
you have at least 5% of shares and voting rights in the company,
you were given the option to buy them at least one year before you’re selling them – if they’re EMI shares.
If the company stops being a trading company, you can still qualify for relief if you sell your shares within 3 years.
If you’re selling assets you lent to the business.
Both the following must apply:
you’ve sold at least 5% of your part of a business partnership or your shares in a personal company,
you owned the assets but let your business partnership or personal company use them for at least one year up to the date you sold your business or shares – or the date the business closed.
Separation
For tax purposes, it is the date of separation which is important. You are treated as together unless you are:
• Separated under an order of a court or competent jurisdiction
• Separated by deed of separation, or
• Separated in circumstances in which the separation is likely to be permanent.
For capital gains tax (CGT) the tax-free exemption for transfers between spouses remains for the year of separation. Nil gain/nil loss treatment will cease to apply in the year following separation. Transfers between husband and wife after the year of separation are made at market value.
A married couple can only have one exemption for their “principle private residence”. From the date of separation, they have one each and may need to make an election to show which property is their main residence.
Any maintenance payments made under the divorce settlement are free from tax in the hands of the recipient. No tax relief is available for the payor.
Stamp duty/stamp duty land tax is not normally charged on the transfer of assets between spouses or on divorce.