Property owners

With reference to letting property
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.

• An exception is finance costs of residential landlords (e.g. mortgage payments or arrangement fees). These are not deductible for tax purposes, but a ‘tax reducer’ is given equal to 20% of the disallowed costs. This reduces the landlord’s income tax payable, but can be subject to restrictions.

• 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 in commercial property, but not in respect of residential property.

For the latter, the cost of renewing existing furnishings can be taken as a revenue deduction.

• The Rent-a-Room rules provide 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.

Tax 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, elections for 2024/25 will need to be made by 31 January 2027. Your taxable profits will then be calculated by matching income and expenditure to the period to which they relate, irrespective of the cash movements.

• 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
– to pay tax on your rental profits after deduction of expenses in the usual way (with no £7,500 allowance).

• You can use whichever method produces the lower tax liability.

• The abolition of the tax-favoured furnished holiday let (FHL) regime on 6 April 2025 means that such landlords are now governed by the normal rules for residential lets. Make sure you have budgeted for the higher tax bills that may result, due to:
– The disallowance of finance costs (as discussed above); and
– The non-availability of Business Asset Disposal Relief and other CGT reliefs on disposal of properties.

• The income tax rates for property income are due to go up by 2 percentage points from 6 April 2027, to 22% (basic rate taxpayers), 42% (higher rate taxpayers) and 47% (top rate taxpayers). Consider whether, under these new tax rates, your letting business will still be worth operating, particularly if it was previously a FHL and so is also hit by the disallowance of finance costs.

• Making Tax Digital for Income Tax (MTD IT) is being phased in for landlords from 6 April 2026. Make sure you are prepared for this. Further details are given in the Sole Traders article.

Private Residence Relief (PRR)
PRR reduces the gain on the sale of your main home, usually to nil, thus avoiding a charge to CGT. The relief applies for the time that the property is occupied as your main home, plus the final 9 months of ownership. which is extended to 36 months for:
– disabled people or their spouses; or
– individuals moving into a care home.

• Other periods of absence from the property may qualify for PRR as deemed occupation (e.g. if working full-time abroad).

• You need to show that you have occupied the property with the intention of living there as a ‘home’ with a degree of permanence.

• If you own more than one property that you actually use as a home (as opposed to always renting out), you may be able to make a PRR election, stating which property is your main home for CGT purposes.

Planning points
• HMRC often challenge the availability of PRR on a property, particularly where it is a partial claim for a property that was once lived in for some of the period of ownership. Make sure you have enough evidence to show that you were in occupation there (e.g. utility bills, or having notified the DVLC that you lived there).

• Couples should consider jointly owning property for which no PRR election can be made, to benefit from two annual exempt amounts and (possibly) lower rates of CGT when the property is sold.

• If a residential property is not fully covered by PRR when sold and a tax liability arises, a CGT property return has to be filed within 60 days and the CGT on the disposal paid by that date. This is a very tight deadline. To make sure it can be met, it is sensible to ensure that you have a record of all costs you have incurred on the property and all documentation (as highlighed above) to back up any PRR claim. This will enable the taxable gain to be calculated in time to make the 60-day payment.