Landlords Tax Services Ltd - The complete tax service for the commercial property landlord

Overview

The taxation of rental income

This overview relates to Schedule A Business which is applicable to most company landlords. Hotels and Guest Houses are excluded from these general rules. Overseas resident companies are subject to tax on all income arising in the UK. With effect from 1st April 1998 the computation of Schedule A income for Corporation Tax purposes has been brought into line with the treatment applying for Income Tax purposes. Overseas resident companies generally make an Income Tax Return and not the more complicated Corporation Tax Return.

Rents & allowable expenses

Rents less allowable expenses are taxable as part of the taxpayers total UK income. The main rule for allowable expenses is that they must be wholly and exclusively incurred in the course of the letting business. It is important to differentiate initial and capital costs from running costs. Capital costs and set-up costs, which are capitalised, are usually relieved for tax purposes against the calculation of the gain on sale of the investment property. The cost of improvements is normally treated as increasing the base cost of the investment.

The two biggest items allowable as a deduction in calculating taxable net rental income will often be loan (or mortgage) interest and travel where the cost is solely attributable to maintaining the rental income. The lettings agent will incur other costs and as long as these represent routine maintenance these too will normally be allowable. Capital Allowances may be claimed to cover the depreciation of plants, machinery, etc.

Basis of determining "rent"

The rental income for small lettings (under £15k p.a.) is normally calculated as the cash received. Taxable rent from all other lettings are taxable on an earned or receivable basis though relief is normally given for non-recovered rental.

Non-residents

A company is almost always treated as a UK resident company if it was incorporated in the UK. A company is overseas resident if its management and control abide outside the UK. Key tests will therefore be where control is resident and where management is exercised.

In all cases H.M. Revenue & Customs will seek to determine whether a major objective of the existence of any particular factors bearing on residence is the obtaining of tax benefits from non-residents.

Tax Deduction

Since 6th April 1996 managing agents must deduct basic rate tax from the rents collected and pay this to the H.M. Revenue & Customs each quarter. Where there is no managing agent the obligation to deduct and pay to the H.M. Revenue & Customs the basic rate tax falls on the tenant, unless the rent falls below a de minimis figure.

Exemption

Landlords can apply (on form NRL 2) for a formal H.M. Revenue & Customs approval to receive rent gross, and on receiving this, the managing agent then need not deduct tax. This exemption will be withdrawn if the landlord fails to keep his/her tax affairs up to date. It does not exempt the landlord from tax on rental income.

Tax Returns

The non-resident company landlord should make an Income Tax Return unless it has been told in writing by the H.M. Revenue & Customs that a Return is not required. The Tax Return is made up to 5th April each year and must be submitted by 31st January following the end of the Tax Year.

Sale of the Property

Non-resident companies are generally exempt from tax on Capital Gains.

This note is provided as a general overview. It should not be relied upon for taxation purposes, as it cannot provide a complete analysis of the law in any particular circumstance. Taxation is complex and the client should take advice specific to his/her own circumstances. Landlords Tax Services Ltd cannot accept any responsibility for any loss suffered as a result of reliance on the foregoing overview. We will be pleased to advise on any individual situation.