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Income Tax from Property Rentals

This Guide covers the tax year 2015/2016 and earlier tax years. As from April 2016 onwards there are significant changes to reliefs given for furnishings etc. Please note that this Guide does not deal with mortgage interest relief.


A person who owns an interest in land and who exploits that interest to receive rent or other income is normally treated as carrying on a rental business. This includes a company. There are many similarities between the rental business of a company and a rental business of individuals which is dealt with under Income Tax Legislation. This Guide is focused on the Income Tax Legislation.

A person can act in different legal capacities. For example, a person could be the owner of a let property, be a shareholder of a company that lets property, be a member of a partnership that lets property, or a trustee that holds let property. Letting in each of these capacities represents a separate rental business. A loss on one rental business cannot be set against a profit on another.

Profits from UK land or property are treated, for tax purposes, as arising from a business but not from a trade. Whilst the rental business profits are computed using the same principles as for trades they are not trade profits and are subject to a different set of rules. The computation is based on accounts drawn up in accordance with generally accepted accounting practice. For Income Tax purposes the profits or losses should be calculated for the tax year to 5 April so this may require apportionment of accounts figures.

There may be occasions when a person is carrying on a trade of providing services in addition to letting a property. There are also certain letting activities that can amount to a trade.

Record Keeping

Keeping accurate and up to date records is essential.

Property income receipts

All income (except capital receipts) arising from an interest in land is part of the rental business. Even a casual or one-off letting is treated as arising from a property rental business. As with any other business, property income can include payments in kind as well as cash receipts.

Profits or losses from overseas properties and furnished holiday lettings need to be treated separately for tax purposes. For other let properties rental receipts and expenses can be combined, so that expenses on one property can be deducted from the receipts on another. Profits or losses from furnished properties should be identified to ensure that the calculation of any wear and tear allowance claimed is restricted to the relevant furnished lettings.

Deductions and expenses

Rental business expenses must be incurred wholly and exclusively for business purposes and not be of a capital nature (e.g. improvements).

Reliefs and allowances

The Rent a Room Scheme is aimed at individuals who let furnished living accommodation in their only or main home, for example, by taking a lodger. Income is treated as tax free up to a certain amount, unless an election is made otherwise. When gross income exceeds that amount there is a choice between paying tax on the actual profit or on the gross receipts less the tax free amount.

Capital allowances can be claimed on certain items that belong to the landlord and are used within the property rental business, for example tools, ladders and motor vehicles (subject to any adjustment for private use). Capital allowances cannot be claimed on plant and machinery in a dwelling house unless it is a furnished holiday let.

For an ordinary property business (i.e. not a furnished holiday letting business), plant and machinery allowances cannot be claimed on furniture, furnishings or fixtures for use in a dwelling house. Instead a deduction can be claimed for a wear and tear allowance of 10% of the net rent.

The renewals allowance is no longer available.


Any rental business loss is carried forward and set off against rental business profits for the following year. Rental business losses cannot be set against general income (except in limited circumstances). From April 2011 furnished holiday letting losses can only be carried forward and set off against furnished holiday letting profits of the same business.

Losses made in one rental business cannot be carried across to any other rental business the taxpayer carries on at the same time in a different legal capacity.

There are also specific rules for non-resident landlords with UK rental income.

Property Income Receipts

All gross rents and other receipts from land and property must be included as property income before any deductions, for example with property management fees. Income also includes other receipts such as grants (which cover revenue expenditure) ground rents etc.

Any agent fees and other costs should be claimed as a deduction.


Returnable deposits and bonds are generally not rental income and are held separately. Deposits not refunded at the end of a tenancy or amounts claimed against bonds should normally be included as income.

Any deposit balance not used to cover the cost of services or repairs that is repaid to the tenant or licensee should be excluded from the receipts of the rental business.

Jointly owned properties

Where two or more individuals jointly own a property, any profit or loss is normally divided between them according to their share of the property being let unless a different division is agreed. The share for tax purposes must be the same as the share actually agreed.

Where the joint owners are married or in civil partnership, the profits or losses should be split 50/50 unless they own the property in unequal shares and they make an election to have their share match the share they each hold. Each individual accounts for their own share.

Individuals who jointly own a property should know who is keeping the records and have access to them. They are personally responsible for including their share of the profit or loss in their own tax return even if they agree that someone else will keep the records.

Exceptionally, the joint letting activity may amount to a partnership if the degree of organisation is similar to an ordinary commercial business. If a genuine business partnership exists ensure the share of the partnership profit or loss is kept separate from any other personal letting income. A partnership loss cannot be deducted from a personal rental profit and vice versa.

Overseas rental properties

If there are overseas rental properties, the profits or losses must be treated as income of an overseas property business.

Profit or losses of an overseas rental property should not be combined with those of a UK rental business. If profits or losses of the UK and overseas rental businesses are combined this may result in profits or losses being calculated incorrectly, for example if the losses from one are set against profits of the other. Special rules may apply to the commercial letting of furnished holiday accommodation in the European Economic Area.

Rents and other receipts from properties outside of the UK are taxed separately as foreign income even though the profits and losses are computed using trading principles just like those of a UK rental business. Where overseas income has suffered foreign tax special rules apply.

Furnished holiday accommodation

If there is commercial letting of furnished holiday accommodation in the UK or EEA qualifying conditions must be met.

Special tax rules allow the commercial letting of furnished holiday accommodation in the UK to be treated as a trade for some specified purpose - more beneficial capital allowances and certain capital gains reliefs. From 2009 the rules have been extended to include furnished holiday lettings of accommodation elsewhere within the European Economic Area (EEA). In addition, some of the rules on both UK and EEA furnished holiday letting have changed.

Furnished holiday lettings are charged under the property income rules although there are some tax advantages available for furnished holiday lettings if specific qualifying conditions are met. For example, capital allowances can be claimed on furniture and furnishings in the property as well as plant and machinery. The letting should not be regarded as a furnished holiday letting unless all qualifying conditions are met as follows -

A letting for a period of longer term occupation is not a letting as holiday accommodation. A period of "longer term occupation" is a letting to the same person for a continuous period of more than 31 days.

Profits or losses arising from furnished holiday letting businesses should be calculated separately from any other rental business profits and losses. Where furnished holiday lettings result in a loss, these losses can only be carried forward and set against the furnished holiday letting profits of the same furnished holiday letting business.

Deductions and Expenses

All items of expenditure on improving a property cannot normally be claimed against income tax.

When work is carried out to an existing or newly acquired property which results in the asset being altered, improved or upgraded - that is makes it better than it had been before, then such costs are normally capital and should be disallowed in computing the rental profit or loss for tax purposes.

Where any unintentional improvement arises due to the use of new materials, which are broadly equivalent to the old materials, the cost normally remains revenue expenditure. For example, replacing lead pipes with copper or plastic pipes.


It is important to differentiate between capital expenditure and repairs. Repairs are allowable as a deduction against rental income, whereas any capital expenditure should be claimed, if appropriate, against any future Capital Gains Tax when the property is sold.

Repair means the restoration of an asset by replacing subsidiary parts of the whole asset. An example is the cost of replacing roof tiles blown off by a storm. There will not be a repair if a significant improvement of the asset beyond its original condition results - that will be capital expenditure. For instance, there will be a capital improvement if the taxpayer extends the area of the original roof or takes off the roof and builds on another storey.

Examples of common repairs that are normally deductible in computing rental business profits include:

Work commissioned on a property may include expenditure on improvements and also separate expenditure on repairs at the same time. In these circumstances the expenditure on repairs remains allowable. Expenditure may be apportioned on a reasonable basis to estimate the amount attributable to the repair.

Legal and other professional fees incurred in acquiring an asset

Generally, fees are capital if they relate to a capital matter, such as the purchase of property. Therefore costs incurred in respect of acquiring, adding to or selling an asset are normally capital, for example fees paid to a surveyor/valuer, planning permission or registration of title on a property purchase.

The incidental costs of obtaining finance that are wholly and exclusively incurred for the purpose of acquiring the property are normally allowable.

Expenditure on essential repairs to a newly acquired property

If a property is acquired in a derelict or run down state and the price paid for the property was consequently substantially reduced, expenditure incurred in repairing it and putting it into a fit state for letting or use in the business may be capital rather than revenue expenditure.

Repairs to reinstate a worn or dilapidated asset are usually deductible as revenue expenditure. The fact that the taxpayer bought the asset not long before the repairs are made does not in itself make the repair a capital expense. But a change of ownership combined with one or more additional factors may mean the expenditure is capital.

Examples of such factors are:

It is not necessary for all these factors to be present for the expenditure to be capital. The underlying principle is that the cost of buying a property in good condition is clearly capital expenditure. Hence the cost of buying a dilapidated property and putting it in good order is also capital expenditure.

Expenditure incurred prior to the commencement of the rental business

Expenditure incurred prior to the commencement of a rental business is allowable if it is incurred wholly and exclusively for the purposes of the rental business and it is not capital expenditure. In addition, certain conditions must be satisfied for the relief to be due on expenditure incurred before the start of the rental business.

The date of commencement is a question of fact. Where the rental business is letting property, the business normally begins when the letting of the first property begins and not on the date the property is purchased. Relief may be due on expenditure incurred before the start of the rental business if it satisfies all of the following conditions:

Qualifying pre-commencement expenditure is treated as incurred on the day on which the rental business commences.

Capital repayments

Only the loan interest is an allowable deduction in computing the rental profit or loss for tax purposes. If the capital payments are not separated from the interest, for example for mortgage repayments, the rental profits will be understated.

Dual purpose expenses are to be apportioned

Where any expenses are in respect of a property that is used partly for the rental business and partly for private or non-business expenditure should be apportioned accordingly. For example, loan interest where only part of the property has been let or only part of the loan has been used for the purposes of the rental business.

Expenditure relating to life insurance policies (for example a mortgage protection policy) on business loans and mortgages is not wholly and exclusively for the purpose of the business, and therefore is not an allowable deduction against rental income for tax purposes. The incidental costs of arranging business finance are normally allowable but the cost of monthly life insurance premiums are not.

Strictly, if an expense is not incurred wholly and exclusively for the purposes of rental business, it may not be deducted. In practice, though some dual purpose expenses may include an obvious part which is for the purposes of the business, for example, loan interest if the property is partly let. In these circumstances expenses should be apportioned and only the business part should be claimed in computing the rental profit or loss.


If a vehicle is used by a landlord for rental business and non-business travel, the full amount of any running costs, including fuel, insurance, etc paid by the business/landlord may not be wholly and exclusively for the purposes of the rental business. If the costs are not properly apportioned to reflect the business/non-business elements, the deduction claimed will be inaccurate.

Where the business is administered from an office outside the landlord's home, non-business travel will normally include journeys between home and office or let property.

You apportion any costs to reflect the business/non-business elements but must ensure only the business element is allowed. Capital allowances may also be affected in these circumstances.

Where there are separate business premises away from the landlord's home there is normally little doubt that the journeys to and from home are, in part, for the private purpose of commuting. The cost of travel from the rental business premises to and from the rental properties, and between the properties, may be allowable provided it was incurred wholly and exclusively for business purposes.

In a rental business, where there are often no separate business premises, identifying the purpose(s) of the journeys can be difficult. In these circumstances consideration needs to be given to the nature of the business, how the business activities are organised and what purpose(s) the journeys to and from home serve.

The actual costs of any business journeys (tolls, parking fees etc) and a proportion of the road tax, insurance (provided the insurance covers business use), repairs, finance costs, etc, together with the cost of fuel incurred for the journey will generally be allowable.

Expenses claimed by the landlord for business trips must be wholly and exclusively for the purpose of rental business

If a trip within the UK or abroad is for a mixed purpose the whole expense of the trip may not be allowable. For example, when the landlord owns a foreign property and the purpose of the trip is for both the rental business and a holiday then only those items of expenditure that are solely for the purpose of the rental business can be deducted.

If the sole purpose of the trip is for the rental business the expense will usually be allowable in full notwithstanding any incidental private benefit.

You must consider the purpose of the trip. For example, consider whether there was any personal travel included within the trip or if the landlord was accompanied by their spouse/partner and/or family. Where the trip was not solely for the purposes of the rental business ensure the appropriate expenses, for example flights etc, are disallowed.

Employment expenses - where wages and salary costs are being claimed, employment taxes must be applied appropriately

Operation of tax under PAYE and National Insurance Contributions (NICs) can be overlooked where an individual other than the proprietor is employed full time or part time, for example, to collect rents, provide office assistance, gardening etc.

No deductions can be made in computing the rental profit or loss for any drawings paid to the proprietor or partner, including any payment for time spent managing the property.

Sometimes an employee is engaged partly to manage the rental business property and partly on private work or other work outside the rental business. PAYE and NICs must be operated on the entire remuneration of the employee but it may be difficult to ascertain the correct amount to be included as a deduction against the rental business profits. In such circumstances a fair and reasonable split should be made which takes into account all the facts. Only the part of the wage or salary properly attributable to the rental business duties is allowable as a deduction in computing the rental business profit or loss.

If there have been wages or salaries paid to relatives or connected parties the amounts paid must be commensurate with their duties?

Where there is a non-business purpose to wages and salaries paid, for example to relatives or connected parties or where the level of payment is determined by the relationship, then the part or proportion of the payment that is not wholly and exclusively for the purposes of the rental business is not an allowable deduction.

In addition if wages or salaries are not paid within nine months of the end of the period of account they should be disallowed.

You should consider whether the wages or salaries paid to the individual exceed a reasonable level of reward for the value of the work undertaken i.e. the commercial rate. Ensure the overall remuneration package including salary, wages, benefits and pension contributions is take into account when considering whether the amounts were paid wholly and exclusively for the purposes of the rental business.

Where the facts show that a definite part or proportion of the remuneration is not wholly and exclusively for the purposes of the rental business only that part is not allowable.

Rent free letting or lettings at less than normal market rate

Unless a normal market rate is charged for a property it is unlikely that the expenses of the property will be incurred wholly and exclusively for business purposes and should normally be excluded from or restricted in computing the rental profit or loss.

If the business lets a property below the market rate as opposed to providing it rent free they can deduct the expenses of that property up to the amount of rent received. As a result uncommercial lettings should not produce a loss for tax purposes. Any excess expenses cannot be set against profits from another rental property or carried forward to be used in a later year.

Reliefs and Allowances

Wear and tear allowance replacement

Previously, landlords of fully furnished residential properties could apply 10% tax relief to their rental income. This was to cover costs for replacement of fixtures, fittings and furniture.

As of April 2016 landlords can only get the relief for actual costs incurred in replacing items such as furniture, furnishings, appliances (including white goods) and kitchenware.

Deductible expenses include both the cost of the replacement item and also the incidental costs of disposal of the old item. Examples of the types of items included are:

The new relief will apply to landlords of unfurnished, part furnished and furnished properties.

Integral fixtures, such as baths, fitted kitchen units and boilers are not included. This is because the replacement cost of such items continues to be a deductible expense as a repair to the property itself.

For items that class as improvements landlords can only deduct the cost of a like for like replacement, not the cost of the full improvement. For example, replacing a washing machine with a washer-dryer is an improvement. If that washer dryer costs £700, and the cost of buying a new washing machine like the old one would have been £450 then the replacement furniture relief will be £450 not the full £700 it will cost. The government has promised further detailed guidance on what exactly constitutes an improvement as their consultation revealed numerous complexities.

If a landlord is furnishing the property for the first time, then this will not be deductible.

Prior to April 2016 (including the tax year 2015/2016) in the case of fully furnished lettings (but not furnished holiday lettings) a wear and tear allowance of 10% of the net rents (i.e. after allowing for Council Tax and water rates if included in the rent)is allowed. From 2013/14 onwards the renewals allowance for replacement of furnishings etc is no longer available so there is no such relief available in the case of unfurnished or partly furnished accommodation; only the wear and tear allowance for fully furnished accommodation. This will change from April 2016 onwards as noted above.

Rent a room relief

Under the Rent a Room Scheme a qualifying individual can be exempt from Income Tax on profits from furnished accommodation in their only or main home if the gross receipts, before expenses, are less than the exemption limit. However, they cannot then claim any of the expenses of the letting.

Unfurnished lettings and rooms let as an office or for other business purposes, for example storage, do not qualify. The scheme does not apply to companies or partnerships. Neither does it apply if the home is converted into separate flats that are rented out. The exemption limit is £4,250. This increases to £7,500 from April 2016.

Gross receipts include not only rents but also payments made for the provision of any other goods or services (such as meals, cleaning, laundry etc., in connection with the letting). Rent received from letting other properties should be excluded.

If the gross receipts are below the exemption limit the individual is automatically exempt from tax. However, it is worth consideration if an election should be made to have these rents taxed in the normal way - that is, rents received minus expenses. This may be beneficial for a particular year where a loss has resulted, which can be set against other letting income outside Rent a Room. A fresh election needs to be made every year. No special form is required for the election, making the appropriate entries on the Self Assessment Return is sufficient.

Rent a Room Relief applies to a tax year and the exemption limit should be halved when someone else received income from letting accommodation in the same property. This might happen when the property is jointly owned with another person.

Any income over the Rent a Room exemption limit must be treated as taxable rental income

The Rent a Room Scheme provides two methods to calculate the taxable profit when gross receipts exceed the exemption limit. If receipts in excess of the exemption limit are overlooked or one of the two methods is not applied the rental profits may be incorrect.

If the gross receipts exceed the exemption limit ensure one of the methods below is used to calculate the profits. Method A will apply automatically unless an election is made to apply method B.

Method A: profits are calculated in the same was as for any property business. Total gross receipts are added together and allowable expenses are deducted appropriately.

Method B: profits are calculated by taking gross receipts and deducting the exemption limit. When this method is used the individual cannot claim any other expenses.

Once method B has been chosen it continues to apply unless the individual informs HMRC, within the time limits, that they would like the first method to apply again. For example, when the taxable profit for a particular year is less under method A or where expenses are more than the rents, so there is a loss.

Example where method B is better

Mrs. F. lets out a room in her own home. Nobody else lets a room in the house. Her gross receipts for the year are £5,200 with expenses of £1,000, resulting in a profit of £4,200.

She is not exempt from tax because her gross receipts exceed the exemption limit of £4,250. The excess of her receipts over £4,250 is £950 (£5,200 less £4,250).

In Mrs. F's case, method B is better and she elects for it.

Capital allowances

If capital allowances are claimed the expenditure must be qualifying.

Capital allowances may be available on qualifying expenditure incurred on plant and machinery but this depends on the type of property income. They are not generally available where the income is from residential property. They may be available in respect of furnished holiday lettings.

Expenditure incurred on the provision of plant or machinery for use in a dwelling house does not qualify for capital allowances for an ordinary or an overseas property business. Expenditure on plant and machinery in common parts of a building (for example the stairs and lifts) which contains two or more dwelling houses may qualify for capital allowances. Expenditure on plant and machinery may also be claimed where the property is a furnished holiday let.

When the purchaser of a property claims capital allowances on the fixtures acquired with the property, it is important they establish the capital allowances position of the vendor as this will have a bearing on the allowances the buyer can claim. Where a fixture is acquired on or after 6 April 2012 the seller and purchaser may need to use one of three procedures to fix the value of the fixtures (normally within 2 years of the date of sale). In the vast majority of cases the procedure will be for both parties to the sale to make a s198 election.

Accounting periods

For Income Tax purposes a rental business basis period is to 5 April each year. If the accounts are not drawn up to 5 April then the two sets of accounts drawn up to some other accounting date should be apportioned to establish the profit or loss for the year ended 5 April.

The charge for Income Tax is on the full amounts of the profits arising in the tax year. This means that a return has to be made to show the income of the year ended 5 April. The exceptions are:


Rental business losses must be used correctly and set in full against the first available rental profits. Where rental losses are carried forward they must be used in full against the first available rental business profits. There is no provision that allows for a smaller amount to be relieved.

Losses made in one rental business cannot be set against any other rental business that is carried on at the same time in a different legal capacity.

Losses arising from a rental business can be set against other non-rental income in limited circumstances.

Rental business losses are calculated in the same way as rental business profits. So long as the property business continues, losses should be carried forward and deducted from the future profits from the same property rental business, until the losses can be utilised in full.

Expenses incurred on properties let free or below market rate can only be deducted up to the amount of rent received. The excess of the expenses over the receipts cannot be deducted in the rental business and cannot, therefore, create a loss.

Losses cannot be created under the Rent a Room Scheme. So, if the gross rental income is under the exemption limit or the excess income is being taxed under the alternative basis, any actual loss made cannot be relieved unless the individual notifies HMRC within the time limit that rent a room should not apply for that particular tax year.

Only appropriate rental business losses can be set against general income

Property rental business losses should normally be carried forward and deducted from future profits of the same rental business. Losses can only be set against general income in limited circumstances, when they are attributable to capital allowances or agricultural expenses.

In addition the loss relief is restricted to the lesser of :

Additionally, from 2013-14 there is a further limit on the amount of income tax relief that an individual may claim for deduction from their total income in a tax year. The limit in each tax year is the greater of £50,000 or 25% of the individual's adjusted total income.

The amount of the loss attributable to the items detailed above can be set against the general income of the year of loss or the following year.

For example, a loss for 2009-10 can be set against either the general income of 2009-10 or the general income of 2010-11. The end of the year assessment is 5 April 2010, the claim therefore must be made by 31 January 2012.

Overseas landlords

If a landlord is a non-resident, tax must be deducted from the rental payments unless the H M Customs and Revenue agree that it can be paid in full.

Where the owner of a property lives outside the UK for more than 6 months, their letting agent or tenant should normally deduct basic rate Income Tax from the rental paid to the non-resident landlord, unless the letting agent or tenant has received confirmation from HMRC that the non-resident landlord is approved to receive their rental income gross.

You should establish whether any rents are being paid to or received by a non-resident landlord. If so, ensure the landlord receives a certificate showing the tax deducted by the letting agent or the tenant.

For letting agents or tenants unless either of the exceptions apply, ensure that basic rate Income Tax has been deducted and paid to HMRC and a certificate of tax deducted is provided to the landlord by 5 July following the end of the year to 31 March.

The Non-Resident Landlords Scheme is a scheme for collecting tax from the UK rental income of persons whose usual place of abode is outside the UK.

The only exceptions are for:

For non-resident landlords agents should confirm that a tax deduction certificate has been received detailing the tax deducted by the UK letting agent or tenant.


If there has been any disposal of a rental property Capital Gains Tax must be calculated appropriately.

You must ensure previous documentation relating to the purchase of the property and any capital expenditure are retained. This will ensure that the correct expenditure and reliefs are claimed in the Capital Gains Tax computation.

Capital Gains Tax is a tax on the profit or gain made on sale or where someone otherwise disposes of an asset. This includes the gift of an asset. Most real property (except in particular your only or main residence) such as land and buildings, is liable to Capital Gains Tax, which means a capital gains computation is required to work out any gain or loss. Types of property liable to Capital Gains Tax include a rented property (or second home).

Limited Companies

Limited Companies are liable to pay corporation tax. Many of the principles outlined above apply to the computation of corporation tax payable by companies on rental income.

If you would like to speak to a qualified accountant for specialist tax advice please contact our service partners RITA4RENT to discuss what services you would like to employ them for.
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