Accounting for landlords: tax on rental property

Being a landlord used to be relatively simple from a tax perspective. Successive changes to interest relief, stamp duty and capital gains reporting have made it considerably less so.

Rental income less allowable expenses gives rental profit, taxed at your marginal rate. Losses are carried forward against future rental profits from the same property business rather than set against other income.

Mortgage interest on residential lettings is no longer deducted from rental profit. Instead relief is given as a basic-rate reduction against your tax bill. The practical effect is that your taxable income is higher than your economic profit, which can push you into a higher band or trigger allowance tapering.

This single change is what drives most incorporation questions.

Replacing a worn kitchen with an equivalent kitchen is generally a repair. Extending it, or upgrading substantially, is capital and relieved only on eventual disposal. Work carried out before the first letting to make a property fit to let is also usually capital.

A gain on UK residential property must be reported and the tax paid within 60 days of completion, separately from the annual return. Penalties for missing it are common and entirely avoidable with a conversation before exchange rather than after completion.

A company obtains full relief for interest and pays Corporation Tax on profit, which appeals to geared higher-rate landlords reinvesting rather than drawing income. Against that, transferring existing property is a disposal for CGT and usually attracts SDLT, and extracting profit later is taxed again.

It can be the right answer. It needs modelling first.