Property investors - a few tax return pointers
May 2006
Redeeming a mortgage.
The interest charges on your mortgage account are an allowable expense which you can set off against your rental income. Repayments of the capital owed are not. Also if you redeem your mortgage early, and pay redemption penalties, these costs are not allowable.
10% wear and tear allowance
If you own property which is let substantially furnished, you can make a decision to claim a wear and tear allowance each year to cover the costs of renewing furnishings, rather than claim the actual costs of the renewals.
The allowance is based on 10% of the rents received (less council tax or water rates etc. paid by the landlord).
Once you make a choice to claim the 10% allowance you cannot go back to claiming actual renewals costs.
Capital gains tax - indexation and taper relief
If you bought your property before 1998 you will be able to claim indexation relief. This relief basically inflation-proofs your cost of purchase. You will be able to reduce any gain on disposal, by adding an indexed amount to your cost for the period from date of purchase to the 5 April 1998.
From the 6 April 1998 you can also claim taper relief.
Most rented property is classed as a non-business asset. This means that you will not be eligible for this relief until you have owned the property for 2 years. The relief then increases by 5% for each following, complete year of ownership, up to 10 years, when effectively only 60% of the gain is taxable.
Accommodation for holiday lets is an exception to this rule.
Holiday let accommodation is treated as a trade by the taxman, and as a business asset for taper relief purposes. After one complete year of ownership 50% of the gain on sale is taxable. After two complete years of ownership only 25% of any gain is taxable.
So if you still own property purchased prior to 5 April 1998 both indexation and taper relief are available to you when you sell. For property purchased after the 5 April 1998 you can only claim taper relief.
Rent-a-room scheme.
If you rent out part of your own house you can receive up to £4,250 in rents, in a tax year, and pay no tax at all.
If the rents received exceed £4,250 you can elect to either:
- pay tax on the excess rents received over £4,250 - and make no claim for expenses, or
- pay tax on the total rents received, less allowable expenses.
Holiday Let Accommodation.
As mentioned in the notes on taper relief above, holiday let accommodation is treated as a trade for tax purposes. The benefits in capital gains taper relief are set out above. Other tax benefits include:
- Losses can be set off against other income, in the same year.
- Capital Allowances can be claimed for furniture, fixtures and fittings. (But not the 10% wear and tear allowance).
- Rental income qualifies as earnings for pension purposes
Holiday let accommodation need not be a conventional holiday resort property. As long as the required letting criteria are observed, city centre properties could qualify.
