Tax Considerations for Rental Properties

If you own a property that isn’t your primary residence, the income generated from renting it out is subject to income tax. This tax is charged at your marginal rate, but there’s no need to pay National Insurance contributions on rental income.

Allowable Deductions

You can reduce your taxable rental income by deducting certain expenses, including:

• Repairs and maintenance costs
• Letting or agent fees
• Legal fees
• Other related expenses

However, some costs are not deductible, such as:

• The initial cost of domestic items like furniture or appliances. However, you can claim the cost of replacing these items with similar ones.
• Capital costs for new installations or replacements, such as central heating or electrical systems.

Property Allowance

Instead of itemizing expenses, you can opt to reduce your gross rental income by a flat £1,000 property allowance. If you choose this option, no other expenses can be claimed.

For properties owned jointly, each owner can use the £1,000 property allowance individually, applying it to their share of the rental income. Keep in mind:

• The property allowance cannot be used to create a loss.
• It cannot be claimed if:
  • You deduct mortgage interest.
  • Rent-a-room relief is applied.
  • The property is operated as a business partnership.

Mortgage Interest Relief

Mortgage interest deductions are no longer applied directly to rental income. Instead, a tax relief of 20% of the finance cost is available, providing the same benefit to all taxpayers, regardless of their tax band. This means higher and additional rate taxpayers receive the same relief as basic rate taxpayers.

Furnished Holiday Lettings

For furnished holiday rental properties, the full amount of mortgage interest can currently be deducted from rental income. However, this benefit will end in April 2025, following the abolition of the furnished holiday letting scheme announced in the 2024 Autumn Budget.

By understanding these rules, you can better manage the tax implications of rental income and ensure compliance with current regulations.

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