Renting a property can be very taxing

David King Tax Consultant

There are various taxes that are likely to be encountered by the owners of letting rented property.  These include:

Stamp Duty Land Tax (SDLT)

On acquiring a residential property there is a liability to SDLT where the price exceeds £125,000. A rate of 1% applies where the purchase price is between £125,000 and £250,000. The rate applies to the whole of the consideration, rather than just the excess over £125,000. A rate of 3% applies where the price is between £250,000 and £500,000, with a top rate of 4% for a purchase price in excess of £500,000. The banding system means that there are large jumps in the SDLT charge at the various thresholds. For example, on a purchase for say £245,000, the SDLT is £2,450, whereas at a price of £255,000 the SDLT is £7,650, giving a staggering marginal rate of 52% on that £10,000 slice! The effect of this is that asking prices might generally be set just below the thresholds.

Income tax

Each year an account needs to be drawn up to 5 April in order to calculate the net income from the property, to be declared to the Revenue on the individual’s tax return. The taxable income is calculated as the rents receivable, less all expenses paid that are ‘wholly and exclusively’ in connection with the letting. Such expenses could include fees paid to letting agents, advertising costs, loan interest, insurance and repair costs. Where the let is on a furnished basis, an allowance can also be claimed for the depreciation of furniture and furnishings provided to the tenant, generally calculated as 10% of rents receivable.

The tax rate applying to the net income depends on the individual’s other sources of income. For a basic rate taxpayer the rate will be 20% for the 2008/09 tax year (22% previously), whereas for a higher-rate payer the rate is 40%. For those individuals at the margin, the rate would be a combination of the two, so would be an effective rate of somewhere between 20% and 40%.

Inheritance tax (IHT)

The value of the property, net of any borrowings secured on the property, is included in the estate for IHT purposes. It is therefore potentially taxable at 40% if the total value of the estate is in excess of the ‘nil rate threshold’, which is £312,000 for the 2008/09 tax year. 

Where the property would qualify as ‘furnished holiday accommodation’ for tax purposes, it may be treated as a ‘business’ asset for IHT, with a relief applying to exempt the value from a tax charge.

Capital gains tax (CGT)

The capital gain is calculated by simply deducting the original cost (including SDLT and legal fees), and cost of any improvements, from the sale proceeds (net of selling costs).

The new CGT system introduced on 6 April 2008 applies a flat rate of 18% to the capital profit realised in excess of the ‘annual exemption’ (£9,600 for the 2008/09 tax year). A married couple could have joint capital gains of £19,200 before being liable to CGT, which can afford planning opportunities on a prospective sale by involving both spouses in the ownership prior to sale.  However, where a property has been let as ‘furnished holiday accommodation’, it should qualify for the more favourable treatment that applies to ‘business’ sales, under ‘Entrepreneurs’ Relief’, meaning that the profit would only suffer a 10% rate, rather than 18%.

As usual, before you take any action based on the contents of this article, it is important that you seek appropriate professional advice.