Year End Tax Review 2023/2024 – Blog 8 – Letting property

• Profits from a rental business are subject to income tax at your marginal rate of tax.

• Expenses incurred wholly and exclusively in connection with the rental business are deductible when calculating net taxable profits, provided they are not capital in nature.

• However, there is a restriction on deductions for finance costs relating to residential lettings.

• Capital expenditure is usually deductible against any capital gain on an eventual disposal of the property.

• The rules for determining whether an expense is capital or revenue in nature for tax purposes are not always straightforward, particularly in relation to repairs and maintenance.

• Capital allowances are available on qualifying expenditure on commercial property, but not in respect of residential property; instead, the actual cost of renewing existing furnishings can be taken as a revenue deduction.

• The Rent-a-Room Scheme provides tax relief of £7,500 per year where an individual rents out a room in their only or main residence.

• There is also a £1,000 property allowance, allowing individuals to receive small amounts of rental income tax-free. An example would be receiving a few hundred pounds of income for renting out a parking space on your driveway.

Planning points

• The default position for an unincorporated property business with a turnover of up to £150,000 is to calculate taxable profits on the ‘cash’ basis (i.e. looking at the cash received and paid during the tax year).

• If you wish to elect out of the cash basis, you have until one year after the relevant self-assessment filing date to make the election (e.g. elections for 2022/2023 will need to be made by 31 January 2025).

• Ensure that any losses are claimed, so that they can be carried forward and offset against future profits from the same rental business.

• If you let a furnished room in your home to a lodger and your gross rental income exceeds £7,500 for the year, calculate whether it is more tax efficient
  • for the excess to be charged to tax; or
  • for you to pay tax on your rental profits after deduction of expenses in the usual way (with no £1,000 allowance).

You can use whichever method produces the lowest tax liability.

The information in this blog provides only an overview of HMRC guidance and legislation in force at the date of publication and no action should be taken without consulting the detailed HMRC guidance and legislation or seeking professional advice.  Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this blog can be accepted by the firm.