When individuals let property they may need to report any property income to HMRC, as income tax will be due on any taxable rental profit. This is done by filing a self-assessment tax return with details of income received and expenses incurred.

If they are not already filing tax returns, they may need to register for self-assessment. The deadline is 5 October following the end of the tax year in which the taxable income arose.

Deductible expenses

A landlord can deduct expenses that are incurred ‘wholly and exclusively’ for the purpose of the letting. Examples include:

• utility bills, council tax and property insurance
• legal and professional costs such as property management fees and accountancy costs for preparing rental accounts
• costs of cleaning the property and maintaining the garden
• cost of journeys exclusively to administer the rental property
• service charges

Repair and redecoration expenses are not always deductible. Those that restore the property to its original state will be, but if capital improvements are made to the property those costs cannot be claimed against income. Advice should be sought on specific expenses if the position is unclear.

Tax relief on specific finance costs (such as mortgage interest) is subject to a restriction.

Cash basis

The automatic ‘cash basis’ has been introduced for taxpayers with gross rental income under £150,000 for the tax year. This is now the default position, but individuals can elect to prepare accounts under the old ‘accruals’ basis if this is beneficial.

Accounts prepared on the cash basis include income received and expenses paid in the tax year, regardless of when due. Accruals basis accounts would include rent due in the year, less any bad debts, and expenses that relate to the tax year, even if paid after it ended.

The non-resident landlord scheme requires the tenant or letting agent to withhold basic-rate tax from any rental payments made to a non-resident landlord. The landlord may still need to file a tax return, and any tax withheld is deducted from the UK tax liability.

The landlord can however apply to HMRC to have the rent paid gross, which is generally granted provided that their UK tax affairs are up to date. The rental income and expenses are then reported on a UK tax return.

This often applies to individuals who leave the UK and let their UK property while living abroad. If they were renting out UK property before moving abroad, and keep doing so, they will still have to apply to have their rent paid gross.

The taxable income is calculated in the same way as for a UK resident.

A deduction can be claimed against rental income for finance costs, such as mortgage or other loan interest. This is only available on debt incurred to acquire land and buildings, or to finance repairs and improvements.

The rules governing the deductibility of finance costs have recently changed for individuals. The tax relief for finance costs, such as mortgage interest, is now restricted.

Instead of a simple deduction reducing the overall taxable profit, relief is given as a basic-rate (20%) credit against the tax payable on the rental profit. Prior to 6 April 2020, transitional rules were in place.

Care should be taken when increasing the debt against a property in the letting business. If this is done to extract capital for use outside the business, the tax relief available may be restricted.

This is a complex area and detailed professional advice should be sought before taking any action.

It is possible to run a rental business through a company. The matters that should be considered include income tax and corporation tax rates, SDLT liabilities, and the impact of a future sale of the property in the company.

The tax analysis will depend on the number of properties comprising the business, whether there is an existing rental business or a new one is being started, and whether or not you or a family member might need to occupy one of the properties.

Where money is borrowed to fund the rental business, the restriction on deductibility of finance charges does not apply to companies.

Capital gains tax (CGT) may be due on a sale of UK residential property.

The gain subject to tax is the difference between the cost of acquiring the property, plus any allowable costs of sale and acquisition, and the sale proceeds. Costs of improving the property during the period of ownership, if reflected in the state of the property at the date of sale, can also be deducted.

Private residence relief (sometimes referred to as main residence relief), the capital gains tax (CGT) annual exempt amount and any current year or brought forward capital losses may be available to reduce the gain. Any taxable gain is then subject to capital gains tax (CGT) at a rate of either 18% or 24%, depending on the individual’s overall tax position.

CGT 60-day reporting

When UK-resident individuals sell a UK residential property at a gain they may need to make a payment of tax within 60 days of completion. A special return may also need to be filed by the same date, irrespective of whether or not the seller is already in self-assessment.  Prior to 27 October 2021, the reporting window and payment date were only 30 days from completion.

Similar rules exist for non-UK residents disposing of any UK property, although non-residents generally need to file a return regardless of whether or not there is tax to pay.

Where the taxpayer is in self-assessment, the disposal will also need to be reported on the relevant tax return.

When a UK residential property is sold, any gain is generally subject to capital gains tax (CGT).

Private Residence Relief (PRR) applies to exempt some or all of the gain when an individual has made a disposal of their only or main residence. PRR is also frequently referred to as ‘Principal Private Residence relief’ or ‘PPR relief’.

The amount of Private Residence Relief that can be claimed depends on a variety of factors, including the period of occupation as an individual’s main residence, ownership of other properties and the size of any garden or grounds.

Periods of ‘deemed occupation’ can also apply to reduce the size of a gain arising on the sale of a property, irrespective of whether or not the individual was living there. The most common of these is the final 9 months of ownership of a property, extended to 36 months in the case of disabled individuals and some care home residents.

In cases where an individual owns multiple properties, the availability of PRR will be influenced by whether or not a PRR election has been made to nominate a particular property as the main residence. Prescribed conditions and time limits apply to these elections and professional advice should be obtained when considering this.