Under this heading we will cover let property including buy-to-let, the letting of rooms, holiday lettings, woodlands and property in enterprise zones.
In general terms, income from property investments is liable for income tax, capital gains are liable for capital gains tax and the purchase of property may involve the payment of stamp duty land tax (SDLT), or land and buildings transaction tax in Scotland (LBTT) or land transaction tax in Wales (LTT) which was covered in chapter 7. Property purchases and rent may also be subject to VAT, which was covered in chapter 8.
Let property
Income earned from an individual or partnership from letting property is liable for income tax in a similar way to income earned by an individual running a business, even though it is actually investment income and not earned income. This is an important differentiation, because investment income cannot be used when calculating potential pension contributions. Also, reliefs that an actual business may be able to use to reduce taxable income are not available for private property letting.
Let property - Income Tax
In calculating the tax due, income from all properties let in the UK is pooled together, regardless of the type of let or lease. Any expenses incurred can then be deducted. These include:
Repairs and maintenance (but not alterations or improvements)
Interest payable on a loan or overdraft associated with the property*
Energy saving allowance - see tax tables
Legal fees
Professional management charges
Insurance premiums
Rates and taxes paid by the landlord
Utilities paid by the landlord
Services provided by the landlord
*Tax relief for finance costs in relation to residential property, such as mortgage interest, is restricted to the basic rate. If the costs are £6,000, the basic rate tax deduction will be £6,000 x 20% = £1,200. The restriction does not apply where costs relate to furnished holiday lettings and non-residential commercial property.
Deductions can also be made for capital allowances, which cover plant and...
Shortened demo course. See details at foot of page.
...choices in the workbook .
Furnished holiday lettings
Furnished holiday lettings are taxed like other lettings but have certain tax advantages.
It is not necessary for the property to be in an acknowledged holiday resort or for the tenants to be on an actual holiday in order to benefit from these advantages . However, the accommodation must be:
Situated in the UK or within the EEA, furnished and let on a commercial basis
Available for commercial letting to the public for periods of at least 210 days in total
Actually let for at least 105 days
If the property is not actually let for 105 days in one year, an average can be taken over two or more properties, which may then enable all properties to qualify.
The property may be let for continuous periods of more than 31 days, but such periods must not exceed 155 days in the tax year. The property does not have to be located in what might already be considered a ‘holiday resort’, and the tenants do not have to actually be on holiday.
Where a property satisfies these conditions, the activity of letting is treated as a trade for the purposes of loss relief. Finance costs are fully deductible (instead of a basic rate tax credit), the individual doing the letting can make pension contributions on the basis of the rental income they receive, and rollover relief, holdover relief and business asset disposal relief are available against gains made on disposal. Capital losses can only be set against income from the same furnished holiday lettings business and not against income from other sources.
Woodlands
Woodlands benefit from several tax advantages, although they are generally only suitable as an investment for wealthy individuals due to the high costs involved in the purchase.
Profits generated from occupation of woodlands in the UK are exempt from income tax and gains on sales, where the woodlands are managed on a commercial basis are exempt from capital gains tax. Inheritance tax can be postponed until the trees are cut and sold, provided the woodlands have been owned for five years.
