Taxation

As a UK resident with rental income you must declare it to H M Revenue and Customs. There are severe penalties for not declaring rental income. You also need to declare your income if you receive rent from properties abroad.

In practice, because you can claim expenses including mortgage interest relief against your rental income, many people don't pay any tax in the early years of letting because they probably make a small loss on the project.

If you have always been an employed person and do not normally submit a self-assessment tax return you will now need to start submitting one - contact your local tax office to inform them about your rental income. You have until 5th October in the tax year following your aquisition and income from property to declare it.

Income from property is classed as investment or "unearned" income but under schedule A tax rules, expenses are allowable as though the letting were a trade or business, so long as these expenses are incurred 'wholly and exclusively' for the rental "business". Allowable expenses include interest on loans, agents fees, insurance, repairs etc.

You can claim expenses that are allowable against income each year on your self assessment tax return, but you cannot claim costs which are deemed to be capital expenditure or improvements. For example, you cannot claim for furniture, fixtures and fittings, but you can opt to claim for replacements on either a renewals basis or a 10% of annual rent "wear & tear" allowance. Repairs can be claimed for, but not improvements. One exception here might be the replacement of single glazing with double.

If your lettings, after allowable expenses, make a loss in the early years (very likely) you can offset these (pool them) against other rental income (not earned income) or roll them forward to following years.

If you live abroad and earn rental income in the UK there are special taxation schemes where income tax is deducted at the basic rate at source either by the letting agent or by the tenants and paid direct to HMRC.  It is possible to get permission from HMRC in advance so that tax is not deducted at source, depending on your circumstances.  This will require you to make an application to HMRC to receive a specific Non Resident Landlord number.

We would always recommend speaking to a tax adviser, or HMRC direct if you are unsure of your liabilities.  Or visit the following website to see frequently asked questions and download useful forms www.hmrc.gov.uk