UK income tax is charged on income from letting property situated in the UK regardless of the residence status of the landlord.
Non-UK-resident owners other than individuals pay tax on the profits computed at a flat rate of 20%
This income is computed using ordinary accounting principles. For example:-
- Income and expenses can be taken into account on an accruals or an arising basis.
- Normal revenue expenses of earning income are tax deductible, including repairs, maintenance, insurance, management fees etc. It is important that detailed records, including invoices, are kept.
- Interest on a loan taken to acquire the property is in principle tax deductible though relief will be restricted to the basic rate of tax on a transitional basis from 6 April 2017 and phased in over 4 years.
- If the loan is taken from a connected party then relief will be restricted to the amount of interest that would have been paid in the open market. Even where capital is available it can often be tax efficient to borrow to invest in UK property. We can assist in evaluating the most appropriate method of finance and in effecting introductions to lenders.
- Capital expenditure (for example, on improvements to property as distinct from repairs and maintenance) is not deductible from rental income. It will instead be regarded as an additional cost to be taken into account when calculating any gain arising on a disposal of the property provided that it can be said to enhance the value of the property.
- No tax relief is available for depreciation or amortisation of the property itself. But in the case of commercial property, capital allowances (which are effectively depreciation allowances at a low standardised rate) are available for those elements of the property which meet the description of “plant and machinery”. This can be a valuable relief and the element attracting these allowances is normally negotiated (within statutory limits) at the time of purchase.
- All lettings carried on by a particular person are amalgamated for tax purposes and treated as a single business; thus if some properties are loss-making and others profitable, the set-off for tax purposes is made automatically.
Non-UK-resident owners other than individuals (such as companies or trustees) pay tax on the profits computed at a flat rate of 20%. Individuals are liable at progressive rates rising from 20% to 45%, though many non-resident individuals (broadly, citizens of any state in the European Economic Area and certain Commonwealth countries) are entitled to claim personal allowances which give exemption from tax for the first £11,000 or so of profit.
The income may also be subject to tax in the property owner’s home state, although if there is a double Taxation Treaty with the UK (which is likely – the UK ‘s Treaties are among the most comprehensive in the world) the treaty will sometimes afford exemption from tax in the home state.