Landlords must declare this income on their tax
returns. If a landlord does not receive an annual
tax return then he or she has a legal
responsibility to notify' the Inland Revenue if
their rental income gives rise to a liability to
tax.
The UK now has a system of
Self-Assessment'. This imposes a considerable
burden on individual taxpayers and there are
financial penalties for those who fail to meet
their obligations.
UK Residents
Income Tax is payable on UK lettings
irrespective of where you live. However through
careful planning and assistance you should be
able to avoid paying some, or even all, of this
tax.
Provisions for setting expenses
against your letting income include the
following:
Deductible Expenses
Generally, expenses must be of a
non-capital nature and incurred wholly and
exclusively for the purposes of letting the
property. This is a statutory definition and a
practical interpretation is sometimes difficult.
Common items of allowable expenditure are:-
Letting agent's
fees.
Tax advisor's fees
for preparing an annual letting account
and agreeing liabilities with the Inland
Revenue.
Usual maintenance
of the property including repairs,
although not, generally speaking, repairs
which amount to improvements.
Water rates,
Council Tax, ground rents, insurance's,
service charges and inventory costs.
A 10% wear and tear
allowance if the property is let
furnished.
Legal fees for
drawing up a lease of less than a year.
Certain expenditure
incurred before the property is first
let.
Non UK Residents
If you are classed as a non UK
resident during the term of the tenancy you
should check the tax implication of letting with
your accountant under the Taxes and Management
Act 1970.
The implications of this Act impose
an obligation upon the letting agent to account
to the Inland Revenue for any income tax payable
on your rental income. We will therefore have to
retain out of your monthly rental a total sum of
money calculated to cover your potential tax
liability. These amounts will vary according to
your individual circumstances, but generally it
will be 25% of the net monthly rental.
It is however, possible to apply to
the Inland Revenue to receive your rental monies
from Simply Lets, gross of tax. In order to apply
for this please ask for an Inland Revenue claim
form from ourselves.
As we may not have details of all
allowable expenses in connection with the letting
we will advise the Inland Revenue only of the
expenses that we are aware of. We strongly advise
that you instruct an accountant to ensure that
all allowable expenses and personal allowances
are claimed against the rental income to minimise
your tax liability.
We will have to enter into a certain
amount of correspondence with the Inland Revenue
during the course of a tax year and pay any tax
demands on receipt. If we are holding surplus
funds once the income tax has been paid, we
refund these to you.
MIRAS
Contrary to popular belief, it may
be beneficial for a Landlord to elect to withdraw
from MIRAS. A tax-payer who withdraws from MIRAS
usually continues to obtain tax relief, albeit
not at source. Again, an accountant can advise
whether you should withdraw from the MIRAS
scheme.
Personal Allowances and
Rates of Tax
All UK resident landlords are
entitled to personal tax allowances. In practice,
these will often be used against other sources of
income before letting income.
Many non-resident landlords are also
entitled to personal allowances. They must be
either Commonwealth citizens, citizens of the
Member States of the European Union, citizens of
Iceland, Liechtenstein and Norway or anyone who
is entitled to personal allowances under the
terms of a Double Taxation Treaty
The net profit, after accounting for
personal allowances, is taxed at an individual's
marginal rate of tax. Rental income does not
qualify for the special 20% rate applied to most
forms of investment income.
A husband and wife should consider
in whose name the let property should be owned to
ensure the most efficient use of personal
allowances and the lower rate bands of tax.
Capital Gains Tax
Capital Gains Tax is a charge to tax
on assets, which increase in value between the
date of acquisition and the date of disposal. UK
real property is a chargeable asset for CGT
purposes.
Certain costs can be deducted for
CGT purposes including incidental costs of
acquisition and disposal such as the fees of a
Surveyor, Valuer, Accountant or Solicitor.
There is an indexation allowance to
counteract the effect of inflation. In other
words only capital growth in excess of inflation
will be charged to tax.
UK landlords are entitled to an
annual exemption. Both husband and wife being
entitled to this.
If someone has previously lived in
the let property they will be entitled to
additional reliefs and they should seek
professional advice.
Non-resident landlords are generally
not liable to CGT and this exemption extends to
property situated in the UK.
Inheritance Tax
Liability to Inheritance Tax is
largely governed by a person's domicile status.
Domicile is a legal status and is a concept,
which is distinct from a person's residence
status. The question of domicile can often
involve complex
Negotiations with the UK tax
authorities and professional advice is
recommended.
UK domiciled individuals are liable
to IHT in respect of their world-wide estate.
Acknowledgements
For further assistance with tax
issues please contact:
Wilfred T. Fry Limited Crescent
House Crescent Road Worthing BN11 1RN.
We thank them for their assistance with the
preparation of this page.
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