Tax deadline looming
I’m sure that landlords need no reminding about what time of the year it is. The jollies and festivities are out the way – now to get down to doing your property rental businesses tax return & getting it submitted before the tax deadline of 31st January. That is unless you want to incur the automatic £100 fine.
Is a landlord a trader, investor or business?
Being a landlord is a strange one for the Revenue. In the old days they used to treat residential property income as investment income. Now profits earned from UK land or property through lettings are treated as arising from a business. They are computed using the same principles as for trades but the landlord & taxpayer is not actually treated as if they are trading. Their earnings instead are treated as unearned income. This all suggests that the Revenue are as confused as landlords are about how they should treat us when taxing what we do! In the words of the Revenue:
“Various court cases have established the principle that income derived from rights of property in UK land is very unlikely to be trading income except in a hotel or guesthouse activity, where the whole income from guests is usually chargeable as trading income. The mere fact that the taxpayer spends a lot of time working in their letting business – perhaps even all their working time – does not convert rental income into trading income, PIM4300 has more details. (Salisbury House Estates Ltd v Fry  15TC266, Griffiths v Jackson  56TC583.)
The current property income rules compute the income of a rental business, broadly, as though it were a trade. But the established distinction between exploiting the rights of ownership of land to generate investment income and carrying on a trade remains.”
Firstly a landlord should realise that running a property rental business, even on a small scale is a serious business. They should therefore keep accounts even if they are only drawn up with basic accounting principles.
Property Hawk has provided within its Property Manager a simple to use software tool that allows landlords to calculate and record their rental property finances. The good thing is that these records once created remain online and accessible any time a landlord might need to access them in the future.
In calculating a landlord’s income tax liabilities a landlord can off set certain deductions against rent. For convenience the Property Manager has provided 5 basic categories under which to group these expenses.
They are as follows:
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 -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 – this could be accounted as a capital allowance (see section on capital allowances below)
For more information on deductions see the Landlords Bible
Landlords should remember that when considering expenditure in connection with their rental business the golden rule that the Revenue uses when evaluating the acceptability of an expense is that it must be "wholly and exclusively" for the purpose of the lettings business.
General tax information
As I have already said, income from property is normally taxed as investment income (unearned income) in the UK, except in certain special circumstances:
- Furnished Holiday lettings – ( which are treated as a trade – earned income )
- Lodgers in a furnished private home sharing with the landlord – the ‘Rent-a-Room Scheme’
- Lodgers – where additional services are provided such as meals and laundry, etc where this may be classed as a trade and constitute earned income
The revenue treats all a landlords individual buy-to-let rental properties as a single business when calculating a tax liability. Therefore a landlord does not need to calculate individual accounts for each residential investment property. This has an advantage for the landlord in that a rental profit on one residential investment property can be offset against the loss on another. Losses on rental income may also be carried forward against future buy-to-let properties, but this must be offset against the next available profits.
The landlord’s taxable income for their rental business, which I have already mentioned will almost certainly be classified by the revenue as a Schedule A business, is assessed on a current fiscal year basis, i.e. from 6th April to 5th April. The exceptions being if the lettings business can be shown to constitute a trade i.e. a furnished holiday let, in which case the trading basis period is used.
Where the rental income is below £15,000 p.a. a landlord can normally by concession prepare their accounts on a cash basis, which means rent & expenses are only recorded when they are received or paid and only total income and expense figures are required on the tax return, as opposed to a detailed schedule. Unfortunately for landlords where their rental income is greater than £15,000 p.a. their income should be calculated on an accounting (accruals) basis. This means that rent due and any work done, but not necessarily billed for, is the basis of the tax charge.
5 TAX SAVING TIPS NOT TO MISSED – read article.
Finally, if you are one of the unlucky landlords that gets picked up by the revenue as part of their ‘random’ sampling of taxpayers, you might want to know how a landlord can survive a tax investigation