Once your property letting business is up and running, any later expenditure leading up to the letting of the second and subsequent properties is part of your lettings business and can be deducted, as long as it qualifies as tax deductible.
End
Your property letting business finishes when you no longer have any properties available for rent, and you are not looking for tenants. This may be because you have decided to occupy the last property yourself, or you are keeping the property empty prior to sale.
You can’t deduct any revenue expenses which are incurred after the last property has been withdrawn from the lettings market. Thus the costs of sprucing-up the property post-letting but pre-sale won’t be tax deductible.
How to hold your property
Single IndividualIf you hold the let properties in your own name, you will be taxed on the income and gains arising from those properties. You can’t transfer the income before tax to another person without first transferring an interest in the property.
You should declare all of the income and expenses from those properties on the property income pages of your personal self-assessment tax return. Even if you don’t make a profit from the letting, you need to declare the loss you make so it can be deducted from profits made from lettings in a later period.
Overseas Properties
If you let properties which are situated overseas, the income and expenses from those properties must be shown on the foreign income pages of your tax return. Profits or losses from overseas properties need to be calculated separately from those arising from UK properties.
Joint Owners
Where a let property is held in the joint names of a married couple or civil partners it can provide a useful income stream for the spouse/civil partner who has little or no other income.
In England and Wales you can own a property as joint tenants; where both owners hold an equal interest in the whole property; or as tenants in common where each owner holds
a separate and identifiable share, say 10% and 90% of the property. There are different rules for properties located in other countries, including Scotland.
When a legally joined couple (married or civil partners), own property; as joint tenants, any income from that property must be split equally between them for tax purposes and declared as such on each person’s tax return.
If the same couple hold the property as tenants-in-common in unequal shares, they can make a declaration on HMRC’s Form 17 to have the property income taxed in the proportion that reflects each partner’s beneficial interest in the property. Without the Form 17 declaration the couple will each be
taxed on an equal share of the income from the property. The Form 17 election is not reversible, so once you have elected
to be taxed on your actual share that’s it, unless your actual ownership in the property changes.
Where the joint owners of a property are not married or in a civil partnership, they can agree to share the income from the property in whatever ratio they choose, although this profit- sharing ratio would normally reflect the underlying beneficial ownership of the property.
If you want to split the property income in unequal shares instruct your solicitor to acquire the property as tenants-in- common in the ratio of ownership desired. Where you already own the property as joint tenants it is quite simple to change to
tenants-in-common, but there can be a Stamp Duty Land Tax (SDLT – LBTT in Scotland) charge where the property
is mortgaged.
When the property is sold, any capital gain arising must be split according to the beneficial ownership of each owner.
Limited Company
There can be tax advantages to running a let property business through a limited company, as the company pays tax at 20% on income and capital gains. In comparison, an individual pays income tax at 20%, 40%, or 45% and Capital Gains Tax (CGT) on gains at 18% or 28%. However, the company’s taxable capital gains are calculated differently to those of an individual, so the tax rates are not directly comparable. Also, there may be further tax and National Insurance charges when you extract funds from your company.
The company may also be subject to a 15% rate of (SDLT) when it buys residential property worth over £500,000. The Annual Charge on Enveloped Dwellings (ATED) can also apply to company-owned properties worth over £1m. Relief from both of these tax charges can be claimed if the property is commercially let to an unconnected tenant.
If you already own a company which holds funds not needed for its trade, investing in buy-to-let property can make commercial sense, provided the company can secure a mortgage for the balance of the purchase price. However, where the trade may become overshadowed by the value of the properties it holds it may no longer be classified as a ‘trading’ company, which means it is no longer eligible for
a number of tax reliefs, including entrepreneurs’ relief.
Tax Allowable Expenditure
Not all expenses associated with letting a property are deductible from the rental income for tax purposes, so you need to sort your expenses into categories. Start by dividing them into the ‘capital’ costs connected with buying, selling or improving your properties, and other costs which reoccur as the tenants change – known as revenue expenses.
Allowable revenue expenses can generally be deducted from the rents received for the period (normally the tax year), in which the cost was incurred. But if you have an obligation
to pay a sum in the future (e.g. for a specific repair) you can deduct that future cost in the current period if you are certain of the amount you will have to pay.