Property income: Tax implications for individuals

This is a brief overview of some of the tax implications of renting out a property you personally own. This overview covers residential properties, not commercial property or furnished holiday lettings.

Tax on rental income

Income tax will be payable on the rents received after deducting allowable expenses. Allowable expenses include repairs, agent’s letting fees and replacement furnishings.

Restriction loan interest relief for ‘buy to let’ landlords

Rules have been introduced which restrict the amount of income tax relief landlords can get on residential property finance costs to the basic rate of income tax. Finance costs include mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan.

Landlords of residential properties are no longer able to deduct their finance costs from their property income. They will instead receive a basic rate reduction from their income tax liability for their finance costs.

This restriction does not apply to landlords of furnished holiday lettings.

Replacement of furnishings

A relief enables all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings, appliances and kitchenware in the property. This means the initial outlay on furnishing a property cannot be claimed as an allowable expense.

Examples of eligible capital expenditure are:

  • furniture
  • furnishings
  • appliances (including white goods)
  • kitchenware

but excludes items which are fixtures.

However, please note that the relief is limited to the cost of an equivalent item if there is an improvement on the old item. The deduction is not available for furnished holiday lettings or where rent-a-room relief is claimed.

Tax on sale

Capital gains tax (CGT) may be payable on the eventual sale of the property. The tax will be charged on the disposal proceeds less the original cost of the property, certain legal costs and any capital improvements made to the property. This gain may be further reduced by any reliefs available (especially if you have lived in the property as your home at any time) and the annual exemption and is then taxed at either 18% or 28% or a combination of the two rates.

From April 2020, a payment on account of any CGT due on the disposal of residential property will be required to be made within 30 days of the completion of the disposal. This will not affect gains on properties which are not liable for CGT due to Private Residence Relief.

Furnished holiday lettings

This form of letting is a short holiday let as opposed to letting for the residential market.

To qualify for FHL treatment, certain conditions have to be met. These include the property being available for letting for at least 210 days in each tax year and being actually let for 105 days. On sale, any gain may qualify for the lower CGT rate of 10% where the conditions for Business Asset Disposal Relief are satisfied.

Losses arising in an FHL business cannot be set against other income of the taxpayer. The loss can only be offset against profits of the same or future years.

If you take a holiday in your own property or make it available some of the time to your family or friends, you will need to adjust the level of expenses claimed to reflect this private use.

Tax allowance for property income

There is an allowance available against property income. Where the allowance covers all of an individual’s property income (before expenses), then they no longer have to declare or pay tax on this income. Those with higher amounts of income have the choice when calculating their taxable profits, of deducting the allowance from their receipts, instead of deducting the actual allowable expenses. The allowances do not apply to income on which rent a room relief is given.

Last updated: 17.11.2020

Whilst the information in this document is correct; you should always obtain individual advice from a qualified accountant.