For landlords with residential investment property it’s rapidly approaching that time of year – it’s time to do your tax return. How I envy those people on PAYE, all they have to do is pick up their little slip at the end of the month and Payroll has done all the tax calculations for them.
Life is not quite so simple for those of us with rented property. There is the small matter of the weighty tomb known as your Self Assessment Tax Return. Landlords should start by reading our FREE landlord tax guide. The deadline for filing your tax return online is 31st January to avoid the fine of £100. If you are over 3 months late you may be liable for additional fees and interest payments. To estimate the amount of self assessment penalties go to the Government website.
The critical part of the self-assessment for 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 or viewed using the Government website.
Landlords are facing a taxing end to the year with the deadline of the 31st January for online submission of their self assessment almost upon us. Failure to submit their self assessment by this date will result in landlords incurring an automatic £100 fine.
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Many landlords, particularly those who are heavily leveraged with buy-to-let mortgage debt have not made a rental profit since buying their rental properties. In this situation you may be tempted to avoid preparing and submitting a self assessment form and declaring a loss. This is a mistake as rental losses in previous years can be carried forward and set off against rental profits. Therefore, landlords should ensure that they complete their tax return even if they declare a rental loss. This way they will ensure that their income tax liability for their letting business is minimised in future years.
The essential things is to have access to your paper work for the year. You need to have records of all the rents received and your total income. Remember unless you are running your business as a limited company the tax period relates to the tax year starting on the 5th of April and obviously relates to the year just gone. A landlord also needs to have a record of all their relevant expenses such as any mortgage costs (only the interest are tax deductible). You all need all your bills from contractors and other associated costs. You can get a lot of this info from your bank statement. Remember, if things haven’t changed much since last year (same rent and your rental portfolio is fully let) you can probably use elements of your previous years information so make sure you keep them in accessible form. Then, it’s just a case of pulling all the information together.
You might think that you need an accountant to calculate your property tax liabilities. However working through you Land & Property section within your tax return is pretty straightforward. A key aspect is that your buy-to-let properties are viewed by the HMRC as a single lettings business rather than each property as a stand alone business unit as many landlords tend perceive each of their individual investment properties to be. Employing an accountant can easily cost £500 plus each year. The reality is for most small landlords it takes as long to gather the paper work together for the accountant than actually to carry out the calculations themselves and then submit their submit their self assessment form online.
All a landlord needs to do is:
The general test that the HMRC apply to any expense incurred by a landlord is whether the expense was incurred wholly and exclusively for their rental business. There’s no such thing as a definitive list. Steve Sims author of ‘Understanding and paying less property tax for DUMMIES’ sets out some of the principles of what expenses are allowable.
Nothing stops any landlord claiming an expense that is incurred:
-‘Wholly and exclusively’ for his rental business
- An expense that is not a capital expense
The starting point for any landlord calculating their income tax expenses for their letting business is that every time they spend money on a property, they should ask themself: “Is this a capital or revenue expense?” The rule of thumb is a capital expense is a one-off property expense concerning the:
- Purchase For example, the purchase price and related costs
- Enhancement For example, home improvements like extensions, loft conversions and garages
Where do professional landlords go for their buy-to-let insurance?
Landlords cannot set off capital expenses against rental income or vice versa. Revenue expenses are the day-to-day costs of running your rental business. They generally fall in to two categories:
- Property costs – like the mortgage, rates and repairs
- Business costs – the administrative costs of your property business, like phone bills, stationery, and postage.
The Property Manager 3.0s has divided the expenses into several categories for ease of recording and because these correspond with the categories contained on the HMRC land & property section in the self assessment form:
Rent, rates, insurance; repair, maintenance and renewals; finance charges; legal and professional costs; cost of services provided, including wages; loan interest; other expenses.
The “Wholly and exclusively" Test
Once a landlord has decided an expense is a revenue expense, they must apply the ‘wholly and exclusively’ test. This rule says that expenses cannot be deducted unless they are incurred wholly and exclusively for business purposes. Tax inspectors will want to see documentary proof of contentious expenses – like documents, agreements, notes of meetings and any other records – so make sure you keep detailed and organised records to prove your expenses.
The taxman will listen to what you say about why you are claiming an item as a business expense, but will look at disproving what you say with documentary evidence.
For example, a property owner lives in London and also owns a cottage in Cornwall. The cost of travelling to Cornwall for a family holiday will fail the ‘wholly and exclusively’ test even if the property owner says the visit was to inspect and prepare for a letting. This is called a ‘dual purpose’ expense
If an expense is not wholly and exclusively for the rental business, then strictly, it should not go in the accounts. In practice, some dual-purpose expenses include an obvious part spent for the purposes of the business. Tax inspectors are told to allow a proportion of dual-purpose expenses that are ‘apportioned’. When expenses may be apportioned HMRC guidance for tax inspectors says they may allow a proportion of an expense when a definite part or proportion of it is wholly and exclusively for the purposes of the rental business. Where a definite part or proportion of an expense is wholly and exclusively incurred for the purposes of the business, that part or proportion can be deducted.
An example is the revenue running costs (including standing charges and hire-purchase interest) of a car or van used partly for business and partly for private purposes. If 20% of the car mileage is business mileage, deduct 20% of the running costs of the car, including standing charges.
Keep a business mileage log for each trip, recording:
- The date of the journey
- The start and end point
- The business reason for the trip
- The miles travelled.
Another example of apportioning running costs is using part of your home as an office for your rental business.
How to apportion expenses
Some other expenses that need apportioning are those paid in one tax year that apply to more than one tax year.
For instance, a £350 home insurance bill may be paid annually on 1 January for the period 1 January until 31 December. A landlord should decide how you would apportion expenses – by days or months and apply the formula consistently.
Here’s how our insurance bill is apportioned –
- Daily apportionment
Take the £350 bill and divide by the number of days in the year (Don’t forget leap years have an extra day)
350/365 x 95 days (1 January – 5 April) = £91.10 for the tax year
350/365 x 270 days (6 April – 31 December) = £258.90 for the tax year
- Monthly apportionment
Take the £350 bill and divide by the number of months in the year
350/12 x 3 months (January – March) = £87.50 for the tax year
350/12 x 9 days (April – December) = £262.50 for the tax year
It’s OK to ignore the odd five days at the end of the tax year when apportioning by months.
SPECIFIC FREE TAX ADVICE
If there are specific tax questions relating to your rental property Property Hawk recommends landlords using the forum on Taxation Web.
Property Hawk would like to acknowledge the help of Steve Sims author of ‘Understanding and paying less property tax for DUMMIES’ in the preparation of this article.