Property Tax Relief in the United Kingdom

Tax relief falls into two main categories. Certain expenses incurred to earn property income may be deducted from gross property income. Alternatively, profit from a property business can be calculated on the amounts actually received and paid during the accounting period. Two of the main reliefs for individual landlords and property owners in the UK are mortgage interest tax relief and rent-a-room relief.

Mortgage interest tax relief allows individual landlords in the UK to deduct costs associated with loans used to purchase, improve, or repair their property rental business from their rental income. Tax relief is available on all interest paid on a mortgage taken out to buy a property that one does not live in. However, tax relief may be refused on costs incurred for the maintenance of properties used as furnished holiday lettings or on loans for the purchase of furnishings. In 2009, tax relief no longer offset the high rate of tax, and the government introduced changes restricting the amounts that could be deducted from rental income.

Key reliefs for landlords and homeowners

The main tax reliefs offered to landlords and homeowners in the United Kingdom include mortgage interest relief, rent-a-room relief, capital gains tax relief, and various property business reliefs.

Landlords can usually deduct mortgage interest from rental income to offset an interest liability, just as they can other business expenses. Taxpayers who let out accommodation in their own homes can take advantage of rent-a-room relief. This relief exempts the first £7,500 of income from renting a room (or rooms) in their homes from tax. Landlords who let furnished residential property may also qualify for a 100% capital allowances deduction for the wear and tear of furniture and fittings provided for tenants.

Landlords whose property businesses are not run as a limited company and who receive rent from letting residential property to an overseas tenant can restrict their claim for relief for finance costs to the introductory rate of tax. In addition, certain property business reliefs are available, including relief from business rates and capital gains tax on business assets.

Mortgage interest tax relief

Landlords currently deduct their mortgage interest costs before arriving at taxable profit. This tax relief feature is being phased out. Taxpayers are now subject to a restriction based on the introductory tax rate. Buy-to-let homeowners qualify for the mortgage interest deduction only if their loan is used for buying, building, or improving the property that is rented, or for paying interest on other loans used for those purposes. Any excess interest not applied against rental income is available only to set against other taxable income, to the extent of the taxpayer's lower rate band.

Landlords with modest-scale rental income have no significant deductibles. However, they qualify for the rent-a-room relief scheme, which provides tax relief on income from letting out their own home. Such income can be received totally tax-free, up to a limit of £7,500 per year (or £3,750 for a couple sharing it). Room lettings in principal private residences are tactically tax-exempt rather than simply exempt. Rent-a-room relief can be claimed by individuals but not by companies. It cannot be claimed if the whole of the property is rented out. The relief applies regardless of whether the reports to computation are a principal UK residence.

Rent-a-room relief

If someone has an extra room in their primary home and lets it out for residential use, they may be able to earn up to £4,250 tax-free each year through rent-a-room relief. Couples or civil partners who take on a lodger in their primary home and share the rental income can earn up to £8,500 tax-free. If the total rental income exceeds the threshold, they have to pay tax on the profit – rental income less allowable expenses. They can choose whether to claim the relief if the total rental income does not exceed the threshold. The relief is automatically claimed by including the rental income on the self-assessment tax return, or by including it in the customer’s income assessment for PAYE.

Rent-a-room relief is available for letting out furnished accommodation in their only or main home. It does not apply when rooms are let out in a guest house or boarding house, or in a home that is not the owner’s only or main home. Accommodation is not considered furnished if the furniture consists solely of items the owner would expect tenants to bring, such as beds.

Mortgage interest deduction changes

Changes in mortgage interest deduction rules affect how property owners calculate their taxes. Before April 2017, homeowners could deduct their mortgage interest costs from their rental income. This reduced the amount of income on which they were taxed. But over 4 years, this deduction was phased out. Homeowners now receive a tax credit instead.

Landlords now calculate their rental profits and taxable income without the mortgage interest deduction. Taxpayers in the higher rate tax bracket receive a tax credit at the introductory rate of 20%. This is capped at the amount of mortgage interest paid. None of the mortgage interest costs are deductible for corporate property owners, but they still receive United Kingdom corporation tax reliefs.

Property business reliefs

Owning property and renting it out is a business. In some circumstances, landlords may qualify for the same types of capital reliefs generally available to companies, potentially allowing them to avoid some liability for capital gains tax. These include reliefs for: assets used for both business and personal purposes, trade losses that can be offset against other income during the tax year, or net profit from the three preceding years.

If a property is privately rented, letting is treated as a business if gross income exceeds £1,000. If gross income remains below this threshold, landlords may still choose to be taxed on property business profits, provided they make the election in the year prior to the claims being made. Limited companies or partnerships with corporate partners are not eligible for this relief and must be taxed in accordance with the profits of the property business rules. Other forms of rent relief may be available through a separate HMRC service.

How reliefs are claimed

People can claim reliefs and other property tax reliefs in two main ways.

Self-assessment taxpayers must declare the income covered by their property relief in their taxable income. This applies to rental income, capital gains tax on property disposal, and any other reliefs they receive. All declaration amounts should be zero if the total property income for the year is less than the level at which tax becomes payable. This is irrespective of whether reliefs have been claimed. Relief from the Inheritance Tax on relevant anniversary years should also be declared.

Taxpayers are encouraged to ignore property in personal business accounts when preparing their tax returns. Taxpayers can consult guidance on dividend tax limits and key tax dates on the HM Revenue & Customs website. Taxpayers must retain sufficient evidence for up to 5 years in case an inspector queries their bill.

Self-assessment and tax returns

Most property tax reliefs can be claimed through self-assessment for income tax, corporation tax, or capital gains tax. Self-assessment is an annual tax process by which taxpayers calculate their own tax liabilities. Those who need to send a Self Assessment tax return are also likely to move into self-assessment for other taxes. If tax relief is claimed in another way for Property or Corporation Tax returns, an adjustment may be made in the next Corporation Tax return or the following year’s P&L account.

The Self Assessment Tax Rates and Thresholds sections provide a summary of tax rates and other statutory limits and thresholds that change annually. Some Property Business reliefs are also available for Corporation Tax on Property Business. For the Annual Investment Allowance, the threshold may change depending on whether the expenditure is incurred before December 2020 or between January and December 2021. Some allowances are automatically calculated when returns are submitted. For every other relief, however, it is the taxpayer’s responsibility to ensure that they claim the correct allowances on their tax returns. HM Revenue and Customs (HMRC) publishes guidance on what is available, but it is also responsible for ensuring that it keeps accurate records.

HMRC guidance and records

Landlords and all homeowners use Form SA105 to claim property business and other reliefs. HMRC provides a wide range of guides about claiming property tax reliefs.

Landlords and homeowners should keep records to calculate their profits or losses for tax purposes. HMRC takes their obligation to keep records seriously. Tax inspectors may add money to the test if records are not kept. Landlords in the UK must keep records for five years and ten months after the end of the tax year in which the income subject to tax is created.

Common questions and myths

Many questions arise about property tax relief for landlords and homeowners; not all can be answered here. Below, they cover some of the more common queries, together with details of relevant thresholds or other caveats to claim and advice supporting landlords' eligibility for reliefs.

What about my primary home? The main house is usually exempt from capital gains tax. However, if a person has more than one residence, the main home relief may not apply to the second property. If a person rents a room in their primary home, they may be eligible for rent-a-room relief. There is no tax on rental receipts up to a set amount. A person can also claim letting relief on a property that has been their primary residence throughout the letting period, and they can satisfy additional qualifying conditions. For a boundary, bordering a primary residence, the relief limit is greater than £1 million.

What about local taxes? For local taxes, e.g., council tax, relief may take the form of a reduced amount, an exemption, or a discount for under-25s. An exemption may apply if a property is occupied only by people under 18, or over 18, but under 25 and receiving full-time, non-advanced education. Separated or divorced people may be entitled to a discount provided their former partner does not still occupy the property.

What about student accommodation? Generally, no local tax is payable on properties occupied by students for the whole budget year (e.g., 1 April to 31 March) where a student is registered on a UK-based course.

Practical tips for eligibility

Several key areas may affect the eligibility of landlords, homeowners, and others for property tax relief. First, consider property use. Individuals can usually only occupy one Main Residence for tax purposes. If a couple has different Main Residences, only one can qualify for Principal Private Residence Relief on the sale of its Main Residence. Owners living abroad may also be liable to Capital Gains Tax or Re-Based Tax on the sale of their property unless they have rented it out for less than 3 years in total. Tax reliefs may not apply if the property is rented for less than 3 months. Inherited property may benefit from tax reliefs, but only if the deceased person rented it out or lived in it continuously for 3 years.

Second, housing supply decisions may affect the relief a landlord qualifies for. It is generally impossible to reclaim tax relief on mortgage interest payments if a property is owned for only part of the year. Tax relief on mortgage interest payments for landlords renting furnished accommodation has also changed. Relief on Income Tax for Residential Letting Relief is no longer available in relation to Income Tax periods ending after 5 April 2020. If a property is rented part-concessional to family members, both parties should keep records of reasonable market rent. Non-UK resident landlords claim any allowances or relief when they file a return, usually on SA100. Any chargeable gain or profit-risk on the sale of UK residential property may also need to be reported to HMRC.

Recent changes and plans

There have been significant changes to some of the property tax reliefs available in the UK. The way mortgage interest is deducted from property profits has changed. Relief is limited to the introductory tax rate, meaning that 40% taxpayers cannot claim the complete relief against their income tax bill. Rent-a-room relief, which allows homeowners to rent out furnished spare accommodation in their only or main home without paying tax on the income, has increased in value. The relief is now set at £7,500, but this is the maximum allowance. An income of over £7,500 will usually still be taxable, but the exempt amount can be deducted when calculating the taxable income. Landlords with a gross annual income from letting out furnished spare accommodation of £7,500 or less may benefit from this relief.

There are proposals for further changes to mortgage interest relief on property letting, but these may yet be overturned if the general election produces a different administration. Under the proposed changes for 2020–21, tax relief for mortgage interest payments made by residential landlords has been limited to the introductory rate of income tax (20%). This means that landlords liable to income tax at 40% or 45% are effectively receiving only part of the tax relief on their interest payments, reducing their taxable profits.

Conclusion

Property taxes in the United Kingdom are among the most significant taxes, both in terms of revenue and expenditure. Without appropriate relief, many people would struggle to pay them. The most considerable relief for businesses is the exemption of small business property. For homeowners, the exemption of capital gains tax on the principal residence is by far the most critical relief.

Deductions and reliefs are also available to landlords. Still, they can take many forms, and detailed consideration is required to determine which relief may apply and whether it is of any use. Individuals with tired property businesses should be aware of special rules that allow tax deductions that can give rise to a trading loss. Special rules also apply to the ownership of holiday lettings to ensure that losses do not create tax repayment claims for owners of other types of lettings.