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Maximising Tax Relief: A Guide for Residential Landlords

Published by Susan Basnet
Posted Date: May 27, 2024 , Modified Date: May 28, 2024
Categories: Tax Relief

In an effort to promote residential lettings in the UK, HMRC provides various reliefs and allowances for individuals, companies, or trusts letting out residential properties in the UK. Landlords who properly utilise these reliefs can effectively minimise their tax burden.

This article explores the applicability of the reliefs, and a step a step guide to the claiming process. Dive in, explore, and let’s embark on a journey to transform your tax liability with the reliefs with this article!

Landlord Tax Relief: Basic Rate Relief

Before April 2017, residential landlords were entitled to full deductions for interest payments on their properties. However, with the implementation of Section 24 in the Finance Act 2015, this deduction was replaced by basic rate relief. Under this new scheme, individual landlords now receive a tax credit on the basic rate, which is 20% of the finance costs.

It's crucial to note that the restriction applies to both resident and non-resident landlords. Yet, there's a silver lining for limited companies and landlords in the furnished holiday lettings sector, as they can still fully deduct interest payments. However, with the announcement of Furnished Holiday Let (FHL) abolishment in the spring budget 2024, only companies can benefit from the full deduction.

To illustrate how the relief works for both individuals and companies, let's delve into the following example.

Particulars

Company

Individual

Amount (In £)

Amount (In £)

Turnover/Income

1,000,000

1,000,000

Less: Operating Costs

(250,000)

(250,000)

Less: Administrative Costs

(15,000)

(15,000)

Less: Mortgage Interest

(50,000)

-

Taxable Amount

685,000

735,000

Tax Liability:
        -Corporation Tax @25%
        -Income Tax Liability*

171,250

316,953

Less: Tax Credit Relief on Mortgage Interest (20% of 50,000)

-

(10,000)

Final Tax Liability

171,250

306,953

Property Allowance

Property Allowance is a valuable relief for residential landlords, ensuring that the income from their property business, up to £1,000, remains tax-free. Once the election is made to apply property allowance to the rental property, residential landlords enjoy the benefit of not paying any taxes on the income up to £1000.

Property Allowance

It's important to note that the Property Allowance does not apply in the following scenarios:

  • When the landlord has elected to claim finance costs deduction.
  •  If the Rent-a-Room Relief or other relief have been claimed.

To benefit from this allowance, landlords must make an election within one year from the filing date for the tax year. For instance, for the tax year 2024/25, the election deadline is 31 January 2027.

Good news: Each joint owner of the property is eligible for the £1,000 allowance against their rental income!

Rent a Room Relief

With the motive to promote low-cost rented housing, HMRC provides an additional benefit to residential landlords through the rent-a-room-relief. This relief allows landlords letting out a furnished room in their main residence to earn up to £7,500 of tax-free income from letting out furnished accommodation in their primary residence.

However, it’s essential to be aware that Rent Room Relief doesn’t apply in the following circumstances:

  • Where the property allowance has already been claimed on the income.
  • If the landlord doesn’t reside in the property.
  • For self-contained flats in an individual's main residence if the division into a self-contained unit is only temporary.
  • If the landlord chooses to claim other allowable expenses instead.

Additionally, it’s also essential to remember that the relief decreases to £3,750 for each partner if the property is jointly let out.

For Example, 

Mr. K rents out a room which qualifies for rent-a-room scheme. His yearly rental income amount to £9,000 and his expenses amount to £4,000. In this case, Mr. K has the following options:

Header

Normal Computation (£)

Rent a Room Election (£)

Rental Income

9,000

9,000

Less: Allowable Expenses

(4,000)

-

Less: Rent a Room Relief

-

(7,500)

Net Income

5,000

1,500

Note: Once an election is made for a specific tax year, it remains in effect for subsequent tax years until the taxpayer decides to withdraw it or until their Rent-a-Room receipts surpass the Rent-a-Room limit.

Relief on Replacement of Domestic Asset

Subject to meeting specific conditions, residential landlords have the opportunity to claim a full deduction when replacing domestic assets in their rental properties, thanks to the Replacement of Domestic Asset Relief. To qualify for this relief, the following conditions, in accordance with the Income Tax 2005, must be satisfied:

  • The individual or company claiming the relief must operate a property business that includes the letting of a dwelling house.
  • An old domestic item provided for use in the dwelling-house must be replaced with the purchase of a new ‘similar domestic item.’
  • The expenditure on the new items must satisfy the 'wholly and exclusively' test i.e. the assets must be used wholly and exclusively for the business purpose.
  • Capital Allowance should not have been claimed concerning the expenditure on the new domestic item.

Claiming Reliefs

With the exception of rent-a-room relief, the discussed reliefs do not automatically apply to landlords. These reliefs only come into effect if the landlord actively elects to claim them. The election is made while filing the self-assessment return for the respective tax year. It's a proactive step that landlords need to take to avail themselves of these beneficial reliefs.

When filing the self-assessment tax return, landlords who earn income from property must complete the Supplementary Form 105 along with the SA 100 form to report their property income. On Form 105, landlords simply need to enter the relevant amounts into the corresponding boxes on the right side. Below is an example illustrating the structure of the form. If claiming a specific relief, landlords should input the amount in the highlighted area below:

Claiming Reliefs

Due Date to Make the Election

For a successful claim against these reliefs, it is crucial to make the election to HMRC within specified dates. The election date varies depending on the relief the landlord is claiming. The following table illustrates the election dates for successful relief claims for the tax year 2024/25:

Reliefs

Election Timing (For 2024/25)

Rent-a-Room Relief

One year from the filing date (31 January 2027)

Basic Rate Relief

Filing date, through the SA105 Form

Property Allowance

One year from the filing date (31 January 2027)

Replacement of Domestic
Asset Relief

Filing date, through the SA105 Form

Note: The filing date for tax returns is the 31st of January of the subsequent tax year. For the tax year 2024/25, the filing date is the 31st of January 2025.

Conclusion

In conclusion, as a UK residential landlord, understanding and strategically leveraging available tax reliefs, including Basic Rate Relief, Rent-a-Room Relief, Property Allowance, and Relief on Replacement of Domestic Assets, can optimise your financial position.

Seize the opportunity to transform your tax liability and enhance the financial sustainability of your property ventures. Stay informed, claim your reliefs, and enjoy the financial advantages they bring to your property business.

What reliefs are applicable to landlords partially letting out their main residence?

The primary relief applicable to such a situation is the Rent-a-room relief. In addition to that, landlords can get relief on the capital gains tax when the property is sold. This is called the Letting Relief. The extent of the relief depends on whether the tenant shares living accommodation with the landlord.

Learn whether Letting Relief applies to you with our Guide to Letting Relief.

Need Expert Advice on Maximising Tax Relief as a Residential Landlord?

Contact us today for efficient and
hassle-free assistance.

Susan Basnet
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