Latest News
Rental Properties: Tax Advice
By A.D. Pottie, 22 March 2025
Ad Pottie provides expert advice on managing taxes related to rental properties.
The rental property market has grown significantly over the past few decades. This growth has been driven by relaxed lending practices, increasing property prices, and certain tax advantages. However, the landscape may change depending on potential tax reforms, such as an increase in capital gains tax (CGT) rumored to be announced in the autumn budget on 30 October 2024. There have been reports of property owners selling off their investments due to these uncertainties.
In the meantime, let’s break down the key tax considerations for rental properties, including income tax, capital gains tax, and inheritance tax.
Income Tax
If you’re renting out properties that are not your main residence, rental income will be subject to income tax at your marginal tax rate. Fortunately, National Insurance contributions are not applicable.
You can claim deductions from rental income for various revenue expenses such as agent’s fees, repairs, and some travel costs. Alternatively, you can reduce your gross rent by a property allowance of £1,000 – but keep in mind, this option prevents you from claiming expenses. If you own the property jointly, each owner is eligible for a £1,000 allowance, but this does not apply if you are deducting mortgage interest or running a property business in partnership.
While you can claim a deduction for mortgage interest, it is calculated as a 20% tax reduction instead of a reduction to gross rent. This means higher and additional rate taxpayers receive the same relief as basic-rate taxpayers.
Important Update for Furnished Holiday Lettings (FHLs):
Currently, if you let out a furnished holiday property that meets certain criteria, you can claim the full amount of mortgage interest as a deduction from rental income. However, this will change starting from April 2025. From that point onward, furnished holiday lettings will be subject to the same mortgage interest rules as other rental properties. This means that instead of full deduction, mortgage interest relief will be capped at a 20% tax credit. This change could significantly impact landlords who have been relying on the more favorable tax treatment of FHLs.
Changes to Capital Allowances for Furnished Holiday Lettings:
Additionally, from April 2025, there will be significant changes to the treatment of capital allowances for integral features in FHLs. At present, landlords can claim capital allowances for integral features such as heating, electrical systems, plumbing, and other installations in furnished holiday lettings. However, this relief will be withdrawn from April 2025. From then on, expenses related to these integral features will no longer be deductible as capital allowances.
Urgent Action Required:
Landlords of furnished holiday lettings should consider making necessary upgrades or replacements to integral features before the April 2025 deadline. Taking action before this date allows claims to be made under the current rules. Consulting with a tax advisor to maximize available reliefs before the changes come into effect is highly recommended.
For domestic items like cookers, fridges, or furniture, you can only deduct the cost of replacement with a similar item. Costs related to new or replacement systems like central heating or electrical systems are considered capital expenses and are not deductible from income.
Capital Gains Tax (CGT)
If you sell or dispose of a rental property, the gain is subject to CGT at residential property rates of 18% or 24%. You can deduct associated acquisition and disposal costs, as well as the cost of capital improvements that are still present when you sell the property.
If the property was once your main residence, part of the gain can be exempt based on the proportion of time it was your primary home, including the last nine months of ownership and certain other eligible periods.
Inheritance Tax (IHT)
Rental properties are part of your estate when you pass away, and unfortunately, there are no specific IHT exemptions for these properties. Even if you actively manage a rental portfolio, it is classified as an investment business, so business property relief does not apply.
If you leave rental property to your spouse or civil partner, it is usually exempt from IHT. However, if it’s passed to the next generation, it may attract IHT liability. To avoid this, you could consider transferring the property during your lifetime and surviving for seven years thereafter. Keep in mind, though, that such transfers may be subject to CGT.
Practical Tip
If you haven’t declared previous rental income from the UK or abroad, consider making a voluntary disclosure under the ‘Let Property Campaign’. HMRC generally offers lower penalties for voluntary disclosures than those they initiate. It’s always wise to seek professional advice before proceeding.
Stay proactive about your property taxes to ensure you remain compliant and maximize your returns.