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Let / Rental Properties

Many properties have been purchased, especially in the property boom, with the idea of letting them and, hopefully, in time, realising an increase in value of the property. Some of these purchasers did not realise that they would need to complete an annual personal tax return to record (and be taxed on) the profit on the rental income and, when the property is sold, the profit on the sale of the property.

Recording the Rental Profit on Personal Tax Returns

Depending on your circumstances the tax on the profit of renting the property may be payable on 31 January each year (for the profit relating to the year ended the 5 April before), on 31 January and 31 July each year or an estimate of the tax can be collected through your PAYE employment tax coding with the balance being either refunded or paid at a later date.

To work out the profit on the rental you should consider the income and expenses that you have incurred during the year. Several common issues that arise include:

1.Rental income should be grossed up if your management company has deducted management fees or other expenses before paying you the balance (although usually the expenses that have been deducted can be included in the expenses part of the return and are allowable for tax purposes).

2.It is a fairly common misunderstanding that the profit on the rental income is calculated as rental income less mortgage payments less any other rental expenses whereas only mortgage interest (not the capital element) is an allowable deduction for tax purposes.

3.When work has been done on the property it must be decided if this is a repair (such as repairing the boiler) or capital (such as replacing the boiler) in nature. The first is allowable against the rental income but you only get relief for the latter when you sell the property.

4.If the ownership of the property is the same as the ownership of a trade then there are VAT implications that should be considered.

Recording the Property on Personal Tax Returns

Capital Gains Tax is payable on the profit on the disposal of the property on the 31 January after the year to 5 April in which it was sold. Again, several common issues that arise include:

1.When calculating the profit it is important to remember the capital costs incurred during the period of ownership. It is therefore strongly advisable to retain invoices which relate to this work to support your claim.

2.Any legal or estate agents fees are allowable, whether arising on the purchase or sale of the property.

3.The dates of purchase, sale and rental periods are essential for calculating the correct capital gain (especially considering the changes in capital gains tax legislation over the years).

4.There is a significant relief available if the property that is sold was once where you lived as your main residence. However this is an area that the Revenue sometimes look at closely, and therefore it is very helpful if some proof that you lived there is retained.

If you have or are considering purchasing a rental property and would like to discuss the matter further please do not hesitate to contact us at