According to statistics published by the UK government (2019-2020), 4.4 million households live in the private rented sector in England – this accounts for 19% of all households. For every tenant, there is of course a landlord. For every landlord, there is potentially (and hopefully) a profit being made. Landlords are therefore subject to the UK self-assessment tax system, whereby they are required to report their profits to HMRC in accordance with legislation standards. It might seem simple on the face of it, but there is significant room for error.
This article seeks to provide a basic guide for landlords, addressing some of the most commonly confused areas. However, if this article has reached you too late and you are in the position where you may need to disclose property income, see our case where we assisted an individual to correct their affairs.
A landlord’s duties to the self-assessment system
For most individuals in the UK, their income is taxed at source through their employer’s payroll. This system is not in place for landlords and they must instead report their rental income to HMRC via self-assessment. In order to do this, they must first register with HMRC. The deadline to do this is by 05 October following the end of the tax year (tax years run from 06 April to 05 April). Therefore the deadline to register for self-assessment in the 2022-23 tax year is 05 October 2023.
If filing online, the landlord must have completed and filed their tax return with HMRC within three months of receiving a notice to file or by 31 January following the end of the tax year – which ever date is later. However, if the return is to be filed physically by paper and posted, the deadline is 31 October following the end of the tax year. Generally speaking, most people prefer to file online. For the 2022/23 tax year, the deadline to file online is therefore 31 January 2024.
As the name implies, the responsibility and duty is on the taxpayer to ensure that they pay the correct amount of tax, and pay it on time. The problem is that tax legislation can be extremely complex, especially when individuals wish to consider the more intricate areas of a property business such as property portfolio incorporation.
Calculating profits from residential property income
First and foremost, the landlord must decide if they want to calculate profits on the cash basis or accruals basis. By default, the cash basis is used unless an election is made to use accruals (or if income exceeds £150,000 in which instance it becomes compulsory).
Next the landlord must identify rent received and allowable costs. Rent received is the easy part. Typically, a tenant pays monthly, at the same time each month. These payments can easily be identified in bank statements (or through agent statements if such service is used).
Allowable costs can be more complex and is not as simple as assuming everything that you buy towards the property is allowed. Typical expenses that are allowed include building insurance, agent management fees, council tax, water charges etc. Costs which can be more complicated include repairs and domestic items (furniture, household appliances, kitchenware etc).
Some repair costs are clear such as fixing the lock on a door. However, if a repair goes above and beyond bringing the item to its original state such that it is a significant improvement, then it would be considered a capital expense and would not be allowed as a deduction to profits.
Other costs include working from home allowances, motor expenses and mortgage interest costs. Each of these can require careful consideration. Do not be confused by the individual down the pub that claims you can deduct all of your household bills from profits for working from home – it’s not as simple as that and often not even applicable in the first instance.
An alternative to using actual costs could be to use the £1,000 property allowance. This can be advantageous if actual costs are less than £1,000. This might sound unlikely, but imagine an individual that rents out their driveway for people to park on close to a football stadium, their costs are next to nil. In this case the allowance is very useful and if total income is below this allowance the rents do not need to be reported at all.
Frequently asked questions:
I bought a laptop to handle my property, is this allowed as an expenses?
For an expense to be allowed, it must be incurred ‘wholly and exclusively’ for the purposes of the business. This means that items may only be allowed if their sole purpose is to be used to generate profit. Frequently, a landlord may purchase an item (such as a laptop) that they use for their property business, but it actually has an element of private use. In such instances, an apportionment is required that is perhaps based on time spent using for business and that spent on private use.
The answer is yes, with the caveat above.
Can I claim vehicle expenses for journeys made to my rental property?
Yes. Costs allowed can either be calculated using the flat rate or by using actual costs incurred.
The flat allows a deduction against profits that is a fixed amount per business mile travelled. The first 10,000 miles of business travel is allowed at 45p per mile. Every mile thereafter is allowed at 25p per mile.
If you choose to use actual costs, an apportionment will be required to determine how much is actually used as business milage and apply that rate to the costs. In either case accurate mileage records need to be made and retained.
Can I claim the cost of purchasing furniture for the property?
Yes and no. The instances in which this is allowed refers to the replacement of domestic items relief. For this to apply, the purchase must be a like-for-like replacement of an old item which is not a significant improvement over the older item.
The cost is not allowed where it is the initial purchase of an item. For example, if you buy a new sofa for the property where one did not already exist then it would not be allowed, the key word being ‘replacement’.
I made some repairs to the property before letting, are these allowed?
If the repairs were necessary in order to rent out the property in the first instance, then it would be classed as a capital expense. For example, if there was a broken boiler when the property was purchased then repairing it in order to get the property in a state fit for rent would be capital.
If the repairs were not necessary and the property could be rented out safely, then it would likely be allowable. If a landlord purchased a property with a damaged roof, that was not so damaged that it affected the rental price of the property, but they decided to repair it in order to save the hassle later down the line then this would be allowed.
A helpful question to ask is whether the costs would be allowed had ownership not changed in the first instance. If the answer is yes, then it is likely they would be allowed again for the new landlord.
Should I charge VAT on renting a property?
No. The let of residential property is an exempt supply for VAT purposes and you should not be charging VAT on rent. As it is exempt from VAT, you also cannot claim VAT on costs incurred on the property.
Can I claim costs for using home as an office?
Yes you can and as with many costs there are two methods which can be used. You can claim the flat rate or you claim the actual costs and apportion for the private use.
The flat rate is based on the number of hours spent working from home to manage the property (or properties). The minimum number of hours per month that you must spend working from home to claim this is 25. If you rent out just one property, say, then it would be difficult to convince HMRC that you spend 25 hours a month working from home for the rental. Therefore this rate is more applicable to landlords with multiple properties managed personally.
Where using actual costs, an apportionment will need to be done to identify the proportion of the bills that can be allocated to the office and also to account for how much of it is private use.
Can I claim mortgage costs?
On a technical level, no. Finance costs such as the interest element of a mortgage used to be allowable as a deduction against profits. The rules have since changed and they are instead allowed as a basic rate (currently 20%) tax reducer . For example, if £1,000 was spent on mortgage interest costs, then the individual is allowed £200 to reduce their tax liability.
The rent-a-room scheme allows a landlord to earn up to £7,500 tax free where they let a furnished room of their main home (i.e. the home they live in) to a lodger. The scheme can also be used by those letting property in a capacity where the activity is indicative of a trade (such as bed and breakfast).
Where income from the property is under £7,500, the landlord does not need to register for self-assessment nor pay tax on it. It is only where this threshold is surpassed that you must report it in a tax return. It should be noted that this threshold is not per individual and if the property is let jointly then the threshold is divided by the number of owners.
Once the threshold has been exceeded, you may choose to deduct actual costs from profits or £7,500. By default, HMRC will assume you are using actual costs incurred. An election must be made to use the £7,500 figure instead.
Failure to report property income
HMRC identified that a significant amount of landlords were not declaring rental income and as such they opened the let property campaign in 2013. As the number of suspected landlords were so high, they launched the campaign to invite taxpayers to come forward and regularise their tax affairs as opposed to investigating each individual’s case. By making a disclosure before HMRC issue a ‘nudge’ letter, the individual can minimise the penalties that HMRC may charge.
HMRC has a variety of powers to collect data on the populace included access to Land Registry, Council Tax and electoral role. It is therefore not a matter of ‘if’ HMRC finds out, but a matter of ‘when’.
HMRC will seek to clawback the loss of revenue to them and will charge penalties based on the behaviour of the taxpayer as well as late payment interest on any tax found to be due. The behaviour will also determine how far back HMRC will look. Dealing with disclosures is a delicate process that demands the skills of a tax adviser that has experience in the matter. Do not assume that an accountant will be equipped to deal with such situations, particularly where they are complex.
An accountant will ensure that you are acting compliantly and fulfilling your duties to the self-assessment system. A specialist tax adviser that can also advise on the more complicated elements of property business would be invaluable to any landlord.
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