Guide to Property Taxation & Capital Gains
We hope our Guide to Property Taxation will assist you - click on a link to read more information on that subject: 
- Buy-to-Let Properties Generally
- Furnished Lettings
- Furnished Holiday Lettings
- Capital Gains on Disposal
- Flat Conversion Allowance
- Disclaimer
1. Buy-to-Let Properties Generally
Profits from the letting of properties situated here are normally taxable on UK residents. As are the profits on the sale of such properties. Letting profits are subject to income tax; profits on sale to capital gains tax.
Whether unfurnished, furnished or holiday lettings, they are known as property businesses and their profits are broadly calculated on the same basis as trading activities.
However the Inland Revenue do not accept that such property businesses are trading activities and any losses incurred are not normally deductible against other sources of income such as salary, with the exception of certain qualifying furnished holiday lettings - see Furnished Holiday Lettings.
2. Furnished Lettings
Furnished lettings are entitled to a deduction for furnishings. It may be made on the renewals basis, that is no deduction is allowed for the cost of furnishing in the first instance but replacements are deductible in full, or, if fully furnished, there is an alternative entitlement to a deduction calculated by reference to rentals received.
The Revenue regard a property as fully furnished if the tenant needs only bring his personal effects and linen. Partially furnished properties do not qualify for the alternative relief.
Expenditures need to be distinguished between capital and revenue. Capital expenditures do not qualify as a deduction for income tax purposes. Capital expenditure is, broadly, that which creates an asset and revenue expenditure is the everyday cost of running the property business. The most common capital expenditure for property owners is on fitting out the property with furniture, furnishings and white goods (if it is to be let furnished) and on new kitchens and bathrooms and so on.
Deductible revenue expenditure is typically on decorating, maintenance and renewals. Distinguishing between deductible repairs and non-deductible improvements can be tricky. The renovation of kitchens and bathrooms gives rise to particular problems.
Expenditure prior to letting is another problematic area where the Inland Revenue may take the view that expenditure necessary to put the property in a good enough condition to let is improvement expenditure and therefore not deductible.
It can readily be seen that the potential for dispute is substantial. Under self-assessment rules it is the responsibility of the taxpayer to make a correct Return regardless of the unsatisfactory nature of the tax law (and the uncertainty which arises as a result). Matters are made yet worse for the taxpayer because where the Revenue are successful in disallowing claims for relief then interest and possibly penalties can arise as well as the additional tax payable.
Interest paid on a loan taken out for the purpose of the property business, typically for the purchase of the property, will normally be a deductible expense but problems can arise where borrowing has been taken out under a particular name or names, and the beneficial ownership of the property income is different, for example where one spouse buys the property or receives the income, but with the aid of a loan taken out in joint names with the other spouse. Particular arrangements have to be made if all the loan interest is to qualify for a deduction.
Where properties are jointly owned, the income apportionment should follow the underlying beneficial ownership. If it is desired to allocate the income differently, care must be taken, and in particular different rules apply as between spouses and unmarried couples.
Certain assets that qualify as plant and machinery and which are used in the property business may qualify for capital allowances (a form of relief), but where such items are actually used in the dwelling house then no capital allowances can be claimed.
3. Furnished Holiday Lettings
Many of the remarks with regard to furnished properties generally apply to furnished holiday lettings. However certain qualifying furnished holiday lettings are treated as a trade by the Revenue and as a consequence are granted certain tax privileges.
Briefly, to qualify a property must be let on a commercial basis and with a view to profit, must be available for letting to the general public not less than 140 days in the tax year and the property must actually be let to members of the public for a period of 70 days in the tax year. (Periods of occupation by any person for longer than 31 days will not count).
The tax privileges for qualifying holiday lettings include: -
- Capital allowances are available on all qualifying expenditure;
- Business Rate Taper Relief (or its successor, Entrepreneurs relief ) may be available on any gains on the disposal of the property;
- Losses arising may be set-off against other income such as employment income.
4. Capital Gains on Disposal
Should a gain arise upon disposal of a property as against the original purchase cost then certain deductions may be permitted for improvements made to it.
Expenditures on the property that do not qualify for Income Tax Relief are likely to qualify as deductions for Capital Gains Tax purposes.
Non-Business Taper Relief (scrapped with effect from 6th April 2008) may be available on any gains arising on disposal of a property.
Gains on principal private residences are normally exempt from Capital Gains Tax and therefore special rules apply where the property has been the owner's private residence.
Sale in a tax year following a separation can result in the loss of the exemption and professional advice should always be taken at the outset.
5. Flat Conversion Allowance
This scheme gives 100% allowance for expenditure on conversion of space above shops and other commercial premises into flats for letting. The allowance is available for expenditure by individuals and companies who own or lease property.
The allowances are available for the cost of the conversion of part of the building into a flat, or for the renovation of a flat, and extend to repairs to a building generally where they are incidental to the work on the flat.
The extension of a building to create a flat does not qualify although expenditure to provide access to a flat will.
Buildings that qualify will usually be those which are authorised for business use, typically but not necessarily, as shops. One quite unnecessary restriction is that the storage above the ground level must have been intended primarily as dwellings when the property was first constructed. Its construction must have been completed before 1st January 1980. The property must normally be less than five storeys including the ground floor.
The relief, as you would expect, comes complete with a whole series of other conditions including that it must be self-contained; used for short-term lettings; accessed from the ground floor independently from the business premises; comprise no more than four rooms excluding the kitchen, bathroom and cloakroom; must not be a ‘high-value’ flat and must not be let to anyone connected with the work for which the allowance is sought.
The allowance need not be claimed all at once but rather a reduced allowance can be claimed in the first instance with the balance of the allowance being claimed against the rental income in subsequent years.
6. Disclaimer
While we hope the above has been found to be useful it is intended only as a general guide, may not reflect the very latest developments in tax law, and cannot be a substitute for professional advice.
We cannot accept any responsibility for loss occasioned to any person acting or refraining from acting as a result of material contained in this guide.
