TAX GUIDE FOR LANDLORDS

This fact sheet is a brief guide to taxation regarding lettings, what records you need to keep, and how to make a simple annual return of your net letting income to the Inland Revenue.

It does not however attempt to cover the wider aspects of personal taxation. If you are unsure about any aspect of your tax liability, then you are advised to seek further advice from your accountant or financial advisor.

Will I have to pay tax on my letting income?

Not necessarily - it all depends on your personal financial circumstances. For example, if the let property is mortgaged, and the mortgage and related costs of up keeping the property exceed the rent you receive, then it is possible that no tax will be payable.

Home letting - your tax position

Income tax is payable on rent received from property which is let. Your tax position will determine whether you pay tax or not. All profit you make from letting should be added to your other taxable income for the year, although the financial records for letting must still be kept separate.

You have to pay income tax if the total of your taxable income is greater than your tax allowances.

If the property is only partly used for rental business you may be entitled to extra statutory concessions. Your tax office will be able to give you details.

What expenses can be offset against the rent received?

Only those expenses incurred 'wholly and exclusively' for the purpose of the let can be offset against your letting income. This leaflet explains many of these allowable expenses in a later section. These might include mortgage interest, general repairs and maintenance, insurance and of course Acorn Property Management’s fees.

What records do I need to keep?

You need to keep a record of all income and expenditure incurred in relation to all lettings. The records should show to whom payments have been made and from whom income has been received. Acorn Property Management Services will provide you with a regular monthly statement.

For your guidance in completing your income schedule, the following brief notes will help you to decide what to include and what not to include:

WATER AND OTHER RATES Include here the full amount of water, sewerage and any other rates paid on the property if these are not paid by the tenants. In certain circumstances, a landlord may also be liable for council tax and this could then be included.

INSURANCE You may include the cost of insurance whether of the building or the contents. Insurance against any loss of rents is also an allowable expense, but any income received as a result of taking out such insurance will be taxable. 

REPAIRS & MAINTENANCE This may include any expenses that are for repairs and general maintenance of the property. Costs for improvements to the property cannot be fully set off against tax.

PROPERTY MANAGEMENT FEES On request, at the end of the tax year, Acorn Property Management Services are able to provide you with details of your rental income and management fees.

WEAR & TEAR For property let furnished, you may claim an allowance for the wear and tear of furnishings.

This is simply calculated by taking 10% of the rental income for the year.

OVERSEAS LANDLORDS AND TAX

This Section is a brief guide to describe how rents and tax are handled in the situation where the landlord is resident overseas.

Will I need to pay tax?

All owners of property in the UK are required to pay tax on their letting income unless the income after allowable expenses is less than the individual's personal allowances. However, special rules apply to the UK rental income of non-resident landlords (NRL) or landlords who live abroad (usually more than a six month period).

Non-Resident Landlord Scheme

The new NRL scheme operates for rental income paid on or after 6 April 1996 and replaces the old rules under Taxes Management Act 1970.

If you let your property through Acorn Property Management Services we must operate the NRL Scheme and deduct tax from your rental income, unless we receive written notification to the contrary. In simple terms, from 6 April 1996, Acorn Property Management Services will either :-

• If authorised by the Revenue, pay the rental income to their non-resident client GROSS, or

• Deduct tax at the basic rate on net income subject to certain allowable expenses and deductions.

If your tenant pays the rent directly into your bank account they must also operate the NRL Scheme and deduct tax, unless the rent is less than £100 per week or they receive written notification from FICO (see below) to the contrary.

Administration

The NRL scheme is operated by the Revenue's Financial Intermediaries and Claims Office (FICO).

Non-resident landlords can apply to FICO for approval to receive their rental income gross or with no tax deducted (an 'approval'). If the application is successful, FICO will issue a notice and Acorn Property Management Services will not be required to deduct tax.

Landlords with poor tax histories may be refused an approval, and in these cases agents will be obliged to continue to withhold tax at the basic rate (currently 23%) on their net rental income.

How do I obtain an approval to receive rental income gross?

An approval will allow you to receive all rental income due without deductions to cover tax liabilities. The forms are available from FICO or Acorn Property Management Services.

You can apply for approval if:

• your UK tax affairs are up-to-date

• you have never had any UK tax obligations or

• you do not expect to be liable to UK tax

Many people are entitled to set personal allowances against their income. If your UK income after allowable expenses is less than your personal allowances, then you will not be liable for tax.

Landlords and Agents will be notified simultaneously of decisions to grant or withdraw approval. Approvals can be cancelled by the Inland Revenue if returns are filed late or tax is not paid on time.

What happens if a landlord has no approval?

Acorn Property management Services will be required to withhold and pay the tax due on your behalf if you are non-resident and if approval to receive gross rental income has not been received within 30 days of each quarter. Quarters end on:
30th June, 30th September, 31st December , 31st March

Tax will be deducted at the basic rate as a percentage of the quarterly rental income taking into account only cash received and cash paid by Acorn Property management Services. We will issue you with Certificates of tax paid which you should then include with your tax return.

At the end of the tax year, you should still declare your letting income on your tax return in the normal way and you can reclaim repayment of any overpaid tax.