A quick guide to what should be included when calculating the profit or loss for a property rental business.

Property income receipts – what should be included?

When calculating the profit or loss for a property rental business, it is important that nothing is overlooked. The receipts which need to be taken into account may include more than simply the rent received from letting out the property.

Rent and other receipts

Income from a property rental business includes all gross rents received before any deductions, for example, for property management fees or for letting agents’ fees. Other receipts, such as ground rents, should be taken into account.

Deposits

The treatment of deposits can be complex. A deposit may be taken to cover the cost of any damage incurred by the tenant. Where a property is let on an assured shorthold tenancy, the tenants’ deposit must be placed in a tenancy deposit scheme.

Deposits not returned at the end of the tenancy or amounts claimed against bonds should normally be included as income. However, any balance of a deposit that is not used to cover services or repairs and is returned to the tenant should be excluded from income.

Jointly-owned property

Where a property is owned by two or more people, it is important that the profit or loss is allocated between the joint owners correctly. Where the joint owners are married or in a civil partnership, profits and losses will be allocated equally, even if the property is owned in unequal shares, unless a form 17 election has been made for profits and losses to be allocated in accordance with actual ownerships shares where these are unequal.

Where the joint owners are not spouses or civil partners, profits and losses are normally divided in accordance with actual ownership shares, unless a different split has been agreed.

Overseas rental properties

Where a person has both UK and overseas rental properties, it is important that they are dealt with separately. The person will have two property rental business – one for UK properties and one for overseas properties. Losses arising on an overseas let cannot be offset against profits of a UK let and vice versa. Proper records should be kept so that the income and expenses can be allocated to the correct property rental business.

Furnished holiday lettings

Different tax rules apply to the commercial letting of furnished holiday lettings and where a let qualifies as a furnished holiday let it must be kept separate from UK lets that are not furnished holiday lettings. Likewise, furnished lets in the EEA must be dealt with separately from UK furnished holiday lets.

Getting it right

Good record keeping is essential to ensure that not only that all sources of income are taken into account, but also that any income received is allocated to the correct property rental business.

Partner note: HMRC’s property rental toolkit (see www.gov.uk/government/publications/hmrc-property-rental-toolkit).

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Expenses that landlords can deduct

Landlords must pay tax on any profit from their property rental business (although income from property of less than £1,000 a year can be ignored). In working out the profits, expenses are deducted from rental income. To ensure that the landlord does not pay more tax than is necessary, it is important to deduct all allowable expenses. Remember, the profit calculation is undertaken for the property income business as a whole, not on a property by property basis. Consequently, it does not matter whether the expenses incurred in relation to an individual property exceed the rental income from that property – it is the overall result that matters.

Cash basis

From 6 April 2017, the cash basis is the default basis for eligible landlords. Where accounts are prepared on the cash basis, it is the date that the expenditure was incurred that is the key date.

Allowable expenses

An expense is an allowable expense if it is incurred wholly and exclusively for the purposes of renting out the property.

Common examples of expenses which may be allowable include:

  • repairs and maintenance
  • water rates
  • council tax
  • gas and electricity
  • insurance (e.g. landlords’ buildings and contents insurance)
  • gardening costs
  • cleaning costs
  • letting agents’ fees
  • accountants’ fees
  • rents where the property is sub-let
  • office expenses, such as phone calls, stationery, etc.
  • cost of advertising for new tenants

Interest and other finance costs

Relief is available for interest on a loan up to the value of the property when it was first let. However, the way in which relief is given for interest is changing from relief as a deduction from income to relief as a deduction at the basic rate from the tax that is due.

For 2017/18, relief for 75% of the interest costs is available as a deduction and relief for the remaining 25% as a basic rate tax reduction, for 2018/19, relief for 50% of the interest costs is available as a deduction, with relief for the remaining 50% as a basic rate tax reduction. For 2019/20, only 25% of the interest costs are deductible, with relief for the remaining 75% being given as a basic rate tax reduction. From 2020/21 onwards, relief for all interest costs is given as a basic rate tax reduction.

Vehicles

A deduction for vehicle costs can, from 6 April 2017 onwards, be claimed using the approved mileage rates. This is generally easier than working out the deduction based on actual costs (although this method can be used if preferred). The rates are as follows:

Vehicle Rate
Cars and vans 45p per mile for first 10,000 business miles in the tax year 25p per mile for subsequent miles
Motorcycles 24p per mile

Capital expenditure under the cash basis

Under the cash basis, expenditure for capital items is deductible unless specifically disallowed. Capital items for which a deduction is not allowed include land and cars.

Domestic items

Where the property is let furnished, a deduction is allowed for replacement domestic items, as long as they are of an equivalent standard to the item being replaced. A deduction is not allowed for enhancement expenditure.

Property allowance A property allowance of £1,000 is available. Property income of less than £1,000 does not need to be reported to HMRC. Where income exceeds £1,000, the £1,000 allowance can be deducted instead of deducting actual expenses. This will be beneficial where actual expenses are less than £1,000.