Income tax is a fact of life and is payable on the income you earn, which include the rent you receive from your rental property. But what can landlord’s offset against tax in the UK to help reduce their tax liability? This article takes you through the deductible expenses which will help you to reduce income tax exposure. Here’s our guide to help you understand how your liabilities are calculated.
Before we go on, this article is a high level overview and is not intended to be used as professional tax advice. We are not tax advisors or accountants. You should always seek independent tax advice when it comes to all matters relating to your property and your tax liabilities.
In the UK, investors pay income tax on the net profit generated from their investment. The net profit is calculated as the gross rental income less deductible expenses.
If you’re an individual, non-UK company (up to 5 April 2020) or trustee you will be chargedincome tax on your UK rental income. UK resident companies (and non UK resident companies from 6 April 2020) are liable for UK corporation tax on their rental profits.
What Can Landlord’s Offset against Tax in the UK?
Deductible Expenses
In the UK it is possible to deduct expenses to calculate net profit, which are:
- The cost of repairs and maintenance.
- Agents’ fees for managing the property.
- Ground rents, service charges and other expenditure on common parts.
- Insurance premiums.
- Legal costs of renewing a short lease or tenancy agreements.
- Accountancy fees for preparing accounts and tax computations.
- any unrecovered VAT on the above items above.
Finance Charges
Historically landlords been able to claim tax relief on the total amount of finance costs (interest) paid in the tax year at their marginal rate of tax. However, since April 2017 the amount of interest payments you’re able to deduct has been reduced and the maximum relief available is now 20% of the interest payments made.
Non-Cash Deductions
Non-Cash deductions are not allowed but are now covered on a ‘renewals’ basis. This means you can’t make a deduction for the initial installation of furniture, but the costs of replacements can be claimed. This also includes fixtures such as baths, wash basins and kitchen units. There are no depreciation allowances for capital improvements.
Personal Allowances
- For British Citizens, whether resident or not, there is an entitlement to a personal tax allowance (currently £12,500 per annum for 2020/2021 tax year). EEA Nationals and individuals who are resident and nationals of Thailand and Malaysia are also entitled to UK personal allowances.
- However, personal allowances are reduced by £1 for every £2 of income earned in excess of £100,000, so anyone earning rental profits in excess of £125,000 cannot benefit from a personal allowance.
- Trusts and companies do not benefit from a UK personal tax allowance.
Rates of Tax
The rates of tax on net rental profits for 2019/2020 are:
For Individuals
| Basic Rate | £0 – £37,500 | 20% |
| Higher Rate | £37,500 – £150,000 | 40% |
| Additional Rate | Over £150,000 | 45% |
For Trusts
| If a UK residential property is owned directly by a Trust, there is a basic rate of £1,000 of income that is taxed at 20% and then a flat rate of 45% applies against the remaining income. |
For Companies
| Up to 5 April 2020 non-UK resident companies paid a flat rate of 20% income tax on rental profits. Since 1 April 2017 UK resident companies have paid a flat rate of 19% corporation tax on rental profits. This rate decreased to 17% with effect from 1 April 2020. From 6 April 2020, non-UK companies fall under the UK Corporation tax regime, rather than paying the basic rate of income tax on rental profits. |
Of course, income tax is only one element of tax involved with property investment. There are also taxes at the point of purchase and disposal to consider.
Tax is complicated and you should always seek the advice of a professional tax advisor operating in the same jurisdiction as the property you own.
As an investor, it’s crucial that you review the performance of your property on an after-tax basis. Look out for the new Du Val PropTech platform which will help you do just that.
We hope you have found this article useful, feel free to comment or ask any questions. For more information on about overseas property investment check out our other articles and request your copy of our Buyers Guides from [email protected]
Important notice: Proptech Pioneer and its associated companies seeks to provide investors with guides, information and tools, but we cannot guarantee this information to be accurate or perfect. You use the information at your own risk and accept no liability if you rely on this information. Proptech Pioneer is not a tax advisor, conveyance, lawyer, financial advisor or mortgage advisor. You should seek independent advice from independent professionals before making any investment decision
