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Property Hawk

INCOME TAX

What are a landlord's income tax liabilities?

Tax liabilities for rental properties are assessed on the basis of income and capital gains.  Firstly, let’s examine how the liabilities derived from a landlord’s income are calculated.

Income from property is assessed under the Income Tax (Taxation of Other Income) Act 2005 for individuals and Schedule A ICTA 1988 for companies.

Income and expenses for tax purposes are assessed as a single letting business,  so effectively, if a landlord has one or one hundred properties, Her Majesty’s Revenue & Customs (HMRC) takes the total figure rather than looking at the rental income from individual properties. 

Income is assessed by tax years ending on the 5th April.  Schedule A income is treated as investment income.  As such any losses can only be carried forward and offset against Schedule A income and not personal income such as a salary.  This means that it is important for a landlord to prepare a tax return for their rental properties even if they don't expect to make a rental profit.

Taxable profit is the income that remains after all allowable expenses have been deducted.  This means, a landlord's taxable profit is calculated by taking annual rent and then deducting expenses. 

Categories of allowable expenses on a rental business

HMRC separate expenses into 5 categories.

Legal & professional - Legal services for a remortgage, valuation fees, mortgage broker fees, landlord safety certificate costs, tenancy agreement costs, letting agent fees, admin cost to close a mortgage, membership fees to a professional body

Repair, maintenance & renewals - redecoration costs, appliance repair charges, plumbing, electrical repairs, etc

Rent, rates, insurance, ground rents, etc - landlord insurance, council tax charges, grounds rent

Cost of services provided, including wages
– cleaning, meals

Other expenses - Telecom charges, utility bill costs, computer software, advertising costs, computer purchase (if used exclusively for the business – could be accounted as a capital allowance (see section on capital allowances below)

What are a landlord's allowable expenses?

Repair and renewals

Where a property is furnished or part furnished; rather than to claim as each renewal arises it is possible to make a single claim of 10% of rent as a ‘wear and tear’ allowance.  This is accepted by the Revenue as broadly equivalent to the cost of normal renewals of furniture.  Beyond the fittings, such as furniture there will be renewals and repair to the building e.g. repair to the roof, bathroom and windows, etc.  This raises a real taxation hornet’s nest.  When does a renewal become an improvement? The latter is not an allowable expense against income (although it can be offset against capital gains - see later under Capital Gains Tax( CGT).

There is, as with many tax issues, a grey area of when a renewal becomes an improvement.  It is largely a question of fact and degree in each case whether expenditure on a property leads to an improvement and therefore become a capital expense.  UPVC windows were considered for many years to be an improvement and therefore the expenditure counted as capital.  However, in recent years HMRC have relented and accepted that UPVC is for most people the modern equivalent of wood and therefore is considered a renewal. 

Another example of the way the HMRC approach the subject is their approach to the refurbishment of a fitted kitchen.  For example, they consider that where a kitchen is refurbished, including work such as stripping out and replacement of base units, wall units, sinks, etc, retiling, work top replacements, repair to floor coverings and associated re-plastering and re-wiring.  Provided that the kitchen is replaced with a similar standard kitchen then this is a repair and the expenditure can be off set against income.  If at the same time additional cabinets are fitted that increase the storage space, or extra equipment is installed; then this element is a capital addition and not allowable and the additional expense should be apportioned as a capital cost.  If the standard units are replaced by expensive customised items using high quality materials, the whole expenditure is then judged to be capital.

Loans and Interest

Most landlords will have borrowed money to finance their investment.   When accounting for these costs it is interest payments alone that are an allowable expense.  This means where a loan is a repayment mortgage; only the interest element of the loan can be offset against rental income.  It is also possible for a landlord to offset other loans that have been taken out for the business.  For instance, when one has been raised to finance a new kitchen or extension of the rental property.  It should be quite clear in these cases that the loan is specifically for the business and where possible documentary evidence should be available (just in case the revenue raises an enquiry on the matter).  Therefore, if a loan is arranged, a landlord can try to separate it off from your personal finances.  This could be done by using it to set up a separate business account.

How landlords can save tax on their rental profits?

Firstly, landlords should never evade paying the tax due on their rental properties.  This is illegal and could result in large fines or interest bills being payable.  Tax avoidance is perfectly legal and allows a landlord to pay as little tax as is legally due.  We have a number of tested approaches for a landlord to pay the least amount of income tax on their rental properties.  A landlord should claim their allowable tax expenses on a landlords rental property.  These expenses include the following on top of any finance costs:

Allowable expenses

The cost of travel when travelling to and fro to the rental properties.  This includes meetings with contractors as well as the tenants.
All advertising costs such as print and digital advertising  for a landlords rental property.
Telephone calls and text messages to tenants and others in connection with managing the property portfolio.
The cost of gas safety certificates.
All maintenance costs in connection with the rental properties.
Finance charges such as bank charges.
Subscriptions to trade and industry magazines and websites.
Professional and advisory fees

Finance charges

Most landlords will have borrowed money to finance their buy to let investment.  This will include mortgages, personal loans or even funds from family and friends.  The interest charges on all these loans can be off set against rental profits.

Splitting a landlords rent

A landlord is perfectly able to put a buy-to-let property into joint ownership but then split the rent in the most tax efficient way.

Landlords carrying forward losses

Landlords need to carry forward any rental losses.  This is a legitimate accounting practice and will reduce your rental profits in future years.

Void expenses

Any expenses that occur even when a landlords property is empty (void period) then these such as council tax, utility bills are all deductable even though a rental property remains empty.

Landlords home office expense

Every landlord has a home office even if they don’t realise.  Have a look at the article on claiming against these expenses.

Apportionment against rental business expenses

Landlords don’t always realise that they can apportion some expenses against their letting business.  This is where the expense is incurred ‘wholly and exclusively’ for their letting business.

Landlords should get their tax return in on time

Landlord should ensure that they don’t file their tax return late.  For online filing of their tax return a landlord should go it by the deadline of 31st January.  Paper copies of the tax return are required by 31st October.

Can landlords be green and save tax?

Landlords can save income tax as well as the environment because of the tax breaks introduced under the Government Landlords Energy Saving Allowance (LESA). 

This allows landlords to off set up to £1500 in costs against their rental profit each year by installing certain energy saving items.  The energy saving scheme has been expanded since it's first introduction and now allows landlords to off set their expenditure on the following items of expenditure and from the following dates:

Loft insulation : From 6 April 2004
Cavity wall insulation : From 6 April 2004
Solid wall insulation : From 7 April 2005
Draught proofing : From 6 April 2006
Hot water system insulation : From 6 April 2006
Floor insulation : From 6 April 2007

The principle of apportionment applies to this expenditure so for an example where the energy efficient work is carried out on a mixed commercial and residential building then the costs will have to be apportioned to the residential element.  LESA can be claimed by Landlords living abroad providing that they pay UK taxes.  If a landlord does carry out the energy saving work themselves they can still claim for the materials used in the installation but not an imputed charge for their labour.  The costs of LESA can be claimed when a landlord submits the land and property section of their  self assessment form (SA105)

Example

Landlord rental profits of £20,000

1. Materials for loft insulation : £500
2. Floor insulation paid to contractor: £1000

Total LESA allowance : £1500

Revised rental profits : £18500

Reduced tax liability for landlord paying 20% income tax is:

20% * £1500 = £300

What is the deadline for a landlord income tax return?

The self-assessment deadline for landlords preparing a paper tax return is the end of October and any paper return received on or after the 1st November will automatically incur a £100 penalty.  A daily penalty of £10 is liable for any landlord who fails to deliver the paper tax return within 3 months of the deadline.
 
For most landlords it makes sense to submit the self-assessment return online through the HMRC tax portal.  The deadline for online submission is the 31st of January.  Landlords are always advised not to leave it to the last minute.  The HMRC website has buckled before under the pressure of submissions.
 
The critical part of the self-assessment form that relates to a landlords rental portfolio is the Land & Property Section of the form.  The paper form that has to be filled in is also known as the Self Assessment UK Property SA105 and a copy can be downloaded a viewed using the Government website.

Can landlords prepare their income tax return online?

The simple answer is yes.   A landlord needs to register for self-assessment to be able to complete the form online.  Once a landlord has received the Unique Taxpayer Reference.  A landlord will also need a HMRC online account  sometimes known as a Government Gateway Account to be able to send a self assessment tax return online.   It takes approximately 7 working days to set up the online account because HMRC posts out an activation code, which is required to activate a landlords account.
The above all relates to the government mechanics of submitting a landlords tax return online directly to the HMRC.  Before a landlord does this, they will need to calculate the tax liabilities. 
 

How can landlords calculate their tax liabilities?

Property Hawk’s property management software PM3.0s allows landlords to calculate the tax liabilities for their rental business.  The software is free to use and has been running since 2006.  To do this a landlord needs to start by sign up for the online software:
 
1. Once registered a landlord needs to add the details of their property portfolio including details of each property and the tenancies together with the rents being received.
2. Landlords will then need to add in the rental expenses specified above.
3. Another big expense and probably the biggest for most landlords is the costs of financing their investments.  Mortgage interest charges should be included as an expense and offset against a landlords tax liability.
4. Having added in the details referred to above landlords can then access the data within the tax tab accessed on the left hand tool bar.  This will give a break down of the income and expenses for a landlords rental business by tax year.  A landlord with a rental business generating less than £15000 per annum has the choice by concession with HMRC to calculate their rental business tax liabilities on a cash basis.  This means that expenses and rents are only accounted for when they are received and not when they fall due.  For larger rental businesses landlords will need to use the accruals system, which records the details when payments are due.  It is possible to use both methods of accounting with PM3.0s property management software.
5. Once the income and expenses have been calculated for the financial year it is then possible to add these details directly into the landlords SA (105) within the HMRC online self-assessment form.
There are also a number of online software providers that allow people to prepare their own self-assessment form and then submit the form including the Land & Property section direct to HMRC. 

These software suppliers will charge landlords to use their software.

Allowable expenses

Often confusion arises over eligibility of items of expenditure allowable as an expense when calculating income tax liabilities.  I have therefore listed below a number of these items under the headings; non allowable and allowable expenses:

Non allowable

1. fees in purchasing the property – included in the base cost when calculating any potential capital gain
2. expenses in connection with the first letting of a property for more than one year
3. repairs covered by insurance.  Where a repair is covered then it is only the excess that should be claimed as an expense
4. replacement of a ‘bog standard’ kitchen with a ‘top of the range’ bespoke designer kitchen – classed as capital expenditure.  See HMRC website’s property income manual in the Practitioners Zone for detailed guidance and explanation on repair, reconstruction & improvement.
5. architect or building regulation application to alter property – classed as a capital cost
6. capital expenditure of providing the means of travel (normally a car) is not allowable as a deduction.

Allowable

1. costs of remortgaging a rental property such as surveyors, solicitors and mortgage brokers fees
2. fees received in evicting a tenant where a property is to be re-let
3. accountants fees!
4. cost of any services provided e.g. laundry, gardening and porter.
5. ground rents
6. any interest payable including personal loans and overdrafts which have been used to fund the investment
7. UPVC double glazed windows are now classed as a repair & therefore a revenue item even where they replace single glazing units.
8. costs of evictions e.g. legal costs, court costs, investigations
9. subscription to landlord organisations
10. ‘revenue costs’ of a car (the running costs e.g. fuel, road tax) of trips to rented property, it must be your primary purpose to visit the rental property.  However, as the Revenue put it, if you stop off on the way to collect a paper this is ok!  Where as if you set off to buy a paper and then visit a property on the way this is not.  I think we all now how landlords would perceive this particular journey.

Remember – there’s lots more tax advice in the Landlords Bible including helpful examples of how to go about calculating your capital gains tax liabilities

Non – standard lettings

So far I have referred to the tax treatment of a ‘standard’ buy-to-let property rented on an Assured Shorthold Tenancy.  There are two categories of residential rentals that are treated slightly differently by the Revenue.  These are where somebody rents a room in their house and a furnished holiday let.

Rent a room

Under this system a landlord is allowed to rent out a room in their own home without having to pay tax providing the rent is no more than £4250 pa.  If it is more than this, the taxpayer has the option to have the excess income (i.e. above £4250) taxed as a Schedule A rental profit.  Otherwise the entire rent will be taxed in the usual way on the profit from the gross receipts minus allowable expenses.

Furnished holiday rentals

These are treated slightly differently to the Inland Revenue from a standard residential let.  This is because of the amount of management time involved and the relatively short rental periods. They are therefore are therefore classified as a business rather than an investment.  Consequently a different tax treatment applies. 

To qualify as a holiday let the following criteria must be met.  The property must be:

  • Available for holiday let at least 140 days a year
  • Actually let for 70 days a year
  • Not occupied by the same person for over 31 days in 7 months

The main advantage to landlords with a holiday let is that the activity is regarded as a trade and is assessed under Schedule D.  Therefore, any losses can be offset against an individual’s personal income, which includes their salary.

 

Comments (23)

information at rental income.
I have a same commercial property, the commercial area is occupied by myself and residential part is at the rent. what liabilities of income tax I am liable for?

I have gain guiet agood knowledge from the w site, but i need more clerifications. Thank You.
#1 - Abdul Majeed MALIK - 05/25/2012 - 15:49
To rent my property I need to also rent a property
Can you guide me. I have a 4 bed house I no longer need and have someone interested in renting it. I would need to rent a property to live in,can my rent be offset against the income I will receive?
#2 - Jackie Brown - 07/11/2012 - 09:08
Personal allowance
Can my personal tax free allowance as a married man be set against any rental income?
#3 - paul morris - 10/19/2012 - 11:05
tax allowance
Does rental income form part of my tax allowance as I do not have any other income?
Thanks
#4 - Roger English - 10/20/2012 - 16:51
Remortgaging fees
Iz it possible to claim the cost of Remortgaging (fees etc) to offset against BTL income for Tax Purposes?
#5 - Willem - 12/23/2012 - 13:50
Renting my home to move counties to rent another near schools
I am hoping to rent out my flat to move nearer to my twins' school. Will I have to pay tax on the full rental income recieved or can I deduct the rental that I will have to pay on my new principal home? Thank you. Susie
#6 - Susan Hudson - 02/27/2013 - 18:06
Renting out my only property while I rent a home for myself
Hi,
Similar to a couple of the comments above, I am in a situation where I rent out my only property but (due to work commitments) have to rent another property to live in myself. Is the rent I pay for my rented home (i.e. where I am living) an allowable expense (i.e. can I claim tax relief from the rental revenue I in turn generate by not living in my own home?)
Hope you can help - I have done loads of searching but can't find an answer to this question!
Many thanks, RP
#7 - Richard - 03/12/2013 - 16:14
Capital allowance on BTL
Can i claim a laptap and mobile phone as a capital allowance for my BTL property?
#8 - Rob C - 03/25/2013 - 10:29
Renting out my only property while I rent a home for myself
Again, I'm in a similar situation to:
#7 - Richard - 03/12/2013 - 16:14
#6 - Susan Hudson - 02/27/2013 - 18:06
#2 - Jackie Brown - 07/11/2012 - 09:08

I hope that you can find the answer to this, as I'm finding it really hard!
#9 - James - 03/29/2013 - 13:00
Insurance
I started renting a property out in Dec 2012.

I am confused about how to show my buildings insurance as an expense.

My insurance runs from 20th april to 19th April.

I paid for my the year 20/4/13 - 20/4/14 on 2nd April (i.e paid for it in 12/13 tax year but insurance doesn't come into force until 13/14 tax year). Do I include that cost in this tax return on next years?

Thanks
#10 - Debbie - 04/11/2013 - 10:18
Insurance
I started renting a property out in Dec 2012.

I am confused about how to show my buildings insurance as an expense.

My insurance runs from 20th april to 19th April.

I paid for my the year 20/4/13 - 20/4/14 on 2nd April (i.e paid for it in 12/13 tax year but insurance doesn't come into force until 13/14 tax year). Do I include that cost in this tax return on next years?

Thanks
#11 - Debbie - 04/11/2013 - 13:54
Offsetting mortgage interest against rental income
I would like to move to a new house and rent out my current property to help me pay for the new mortgage. Can I offset the new residential mortgage against my rented property? If not do I need to remortgage my currenr house on a buy to let and use this money to finance my new house?
#12 - Jod - 08/25/2013 - 11:11
Mortgage Repayment Insurance
Hi I have a mortgage on a property that I rent, can I claim insurance to cover the mortgage in the event that I die from my expenses.

Thanks

JB
#13 - Julie - 09/17/2013 - 09:53
landlord licence
Rotherham council are having consultation meetings with private landlords. They are wanting to charge almost £700 per property but only for certain areas in the borough. They are saying inthese areas they are bad for a.s.b. I looked up the area where my properties are there has been none or in other years few. In areas that are not been charge for a landlord licence are far worse of a.s.b. The council also said private landlords have lots of empty properties they may well have only because the council took their tenants & put them in council properties.
I have had this happen to me twice, one tenant was with me 3yrs the other 2yrs then they left when the council offered them a council house. This is out of order!!!!!!
#14 - Maureen Johnson - 02/05/2014 - 08:15
Claiming against property rental expenses for my new tower computer.
I have recently purcased two new tower computers. One of which I use mainly inconnection with the two properties I let out, eg. correspondence with tenants, compiling Agreements, Inventories, contacting utility services. Can I claim a proportion of the original cost against my expenses please?
#15 - A. Soden - 02/07/2014 - 11:48
Servicing my own income properties
I own a landscaping firm and also 3 income properties. Can the landscape firm charge the rental properties for services rendered and can I then deduct that from the rental income?
#16 - Roy Sharp - 03/10/2014 - 22:22
wife's tax free allowance
I have a property on rent which is in my name. My wife does not work. Can i use her tax free allowance to offset against rental income.
#17 - G Salih - 05/06/2014 - 20:33
Let Property Campaign
HMRC are now agressivly targetting landlords with the Let Property Campaign. Last week they sent out a second wave of letter to about 40,000 landlords who they belive have not disclosed rental income: http://www.jeffreyshenry.com/hmrc-let-property-campaign-letters
#18 - Jeffreys Henry - 07/10/2014 - 14:53
Renting out my only property while I have to rent the one I live in elsewhere
Again, I'm in a similar situation to:
#7 - Richard - 03/12/2013 - 16:14
#6 - Susan Hudson - 02/27/2013 - 18:06
#2 - Jackie Brown - 07/11/2012 - 09:08
#9 - James - 03/29/2013 - 13:00
I'm renting out my only property while I rent a home for myself due to work (and pay more on it than my own property 'earns' me). Could the cost of me living in another property (i.e. rent, bills etc) come under 'allowable expenses'? (e.g. under 'home office' cost)?
I'm finding it really hard to find an answer so some help would be appreciated!

Thanks
Mags
#19 - Mags - 08/14/2014 - 12:55
Can rental payments be offset against rental payments received for tax reasons
I want to rent out my current house and rent something larger for a couple of years. Can the rent I pay be offset against the rental income I will receive?
#20 - Andrew Isaacs - 09/03/2014 - 22:17
Rent offset again rental income
I want to rent my home out while i'm working away. While working away in the uk i will be renting a property. Can i offset the rent i will be paying against the rent i will receive from my only property.
#21 - Kevin - 11/26/2014 - 15:17
Renewing kitchen and worn carpets
Is there a time limit, before the commencement of an initial letting, within which tax can be reclaimed for the renewal of old kitchen and carpets etc
#22 - Nigel birch - 12/31/2014 - 09:22
renting out my home
I am renting my family home out while working in another part of the country, where I rent a house. In the month prior to renting out our house, we had some minor repair work done, including regrouting of bathroom tiles, some interior paintwork repair and repair of sections of rotten French windows done. Are we able to claim for these as expenses to offset against tax we will have to pay on the rental?
#23 - Deanne Greenwood - 01/02/2015 - 15:15
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FINANCE AND TAX ON RENTAL PROPERTY

INCOME TAX
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BTL FINANCE - THINGS TO KNOW
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INVESTING IN BTL PROPERTY

A GUIDE FOR NEW LANDLORDS
WHICH PERIOD OF PROPERTY
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FAIR WEAR AND TEAR
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MAINTENANCE OF A RENTAL PROPERTY
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LETTING RENTAL PROPERTY

TEN STEPS TO LETTING
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LEGISLATION OF LETTING PROPERTY

INTRODUCTION
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