Accruals vs cash basis

Rental accounts are relatively easy to prepare for a single property, although you may still prefer the reassurance of using an accountant to look after your affairs.

Previously, both income and cost had to be included in rental property accounts on an “accrued” basis i.e. in the tax period they were incurred rather than when they were paid or received. Since 6 April 2017, the default is the “cash” basis for those with rental income below £150,000pa. This is usually much simpler as it means that you include receipts and payments when the money moves and ignore anything that is still owed. If this is your only business income then it is easier to manage as you can just keep a separate bank account for your property transactions.

You can still opt to use the accruals basis if you prefer.

Repairs or improvements?

Repairs and improvements are both allowable costs but it is an important distinction as tax relief is claimed in one of two ways depending on whether building work is repairing or replacing pre-existing materials or whether it is an improvement.

Repairs and maintenance usually include:

• Painting and decorating
• Re-pointing existing brickwork
• Damp or rot treatment 
• Repairs to existing equipment, windows, doors, etc.
• Replacing a roof

Capital items are work that improves the property such as an extension. These costs can be claimed to reduce your capital gains tax when you come to sell the property.

Sometimes it is hard to tell if an item is a replacement or an improvement so, if you’re unsure, do take advice.

Furniture and fittings

Another recent change is the removal of the 10% wear and tear allowance to cover furnishings (beds, sofas etc) or appliances. Since 6 April 2016, it is only possible to claim the actual cost of repairing or replacing these items. This means that you now need to keep your receipts etc.

Capital gains tax

When the time comes to sell, hopefully, your property will have increased in value. Unlike selling your main home, this increase in value is taxable as a capital gain.

The good news is that you can claim the costs of purchasing, selling and improving the property.

If the property was your main residence at any time then there may be reliefs available. You may also qualify for up to £40,000 lettings relief per owner. Although changes to lettings relief, restricting its availability, will come into force in April 2020. You can find more information on capital gains tax (including lettings relief) here. Lettings relief is complex and if you wish to see whether you qualify for this relief, your best option is to seek advice from a qualified accountant.

Your taxable gain will be:

Selling price X

Less purchase price X

Fewer purchase costs X

Less selling costs X

Less any improvements X

Capital gain X

Less any tax reliefs X

Taxable gain X

There is an annual capital gains allowance for each owner to offset net gains/losses in the year of disposal. Everything above this allowance is currently taxed at 18% or 28% depending on your normal tax rate.

If you are thinking of selling a property that has significantly increased in price then it may be worth taking individual tax advice early in the process and definitely before the sale itself as there may be actions that can be taken to minimise your tax burden.

Furnished holiday lets (FHL)

Special rules apply when letting out a holiday property in the European Economic Area (EEA). These rules may well change following our exit from the EU and/or EEA.

To qualify as an FHL, the property must be:

• Available to let commercially for at least 210 days in the year
• Let at a commercial rate for at least 105 days per year
• Any letting periods over 31 days long can’t be included in the 105 days and the total of all such longer lets must be less than 155 days per year.

If you own an FHL then these properties must be accounted for separately from your other properties, however, there are additional reliefs available. The rental income is a useful way to part-fund what may be your own holiday home.