Becoming a property investor can be a fun or hell depending on if you do it right.

So, you’ve just bought an investment property. Congratulations you are a property investor – what next?

In terms of whether, you should hold your property as an individual, partnership or in a company will depend on a variety of factors, we discuss these further here (link). If you would like to discuss incorporating your property portfolio, then please do get in touch with the office.

For income tax, profits from rental property or land are either categorised as a UK property business or an overseas property business.  UK property business are made up of properties in England, Wales, Scotland, and Northern Ireland. Property or land on the Isle of Man or the Channel Islands are treated as overseas for the purposes of the legislation

All the profits from your UK properties are pooled together and reported as one business and the same for your overseas ventures. There are a few exceptions:

• Furnished Holiday Lets (FHL), these are calculated and reported separately. Please see our article on FHL’s here (link)
• Properties that are let at an uncommercial rent

What is property Income?

Property income, otherwise known as rental income, is monies generated by renting land or property to others. It is earned when others pay you for the use of the property or land. The property may be owned by you and others, then it is referred to as joint owners. The other owners may be a partner, spouse, or friend. However, the buildings or land is owned it is still considered property income. However, it does affect the way it is taxed.

Rental Income with Joint owners

Depending on how many other people you own a rental property with and what share you hold will depend on the rental income. If you all own equal share to find the annual rental income you divide the total annual income by the number of owners

Calculating the profits and losses of a property business

knowing your numbers is essential as a property investor. When calculating the profit or loss for a property rental business, it is important that nothing is overlooked. The receipts which need to be taken into account may include more than simply the rent received from letting out the property.

Rent and other receipts as a property investor

Income from property rental property business, gross rents received before any deductions, for example, for property management fees or for letting agents’ fees. Other receipts, such as ground rents, should be considered.

Deposits

Deposits can be complex – But an essential part of being a property investor A deposit can be taken to cover the cost of damage incurred by a tenant. If you are letting under an assured shorthold tenancy then the deposit taken will be placed in a Tenancy Deposit Scheme

Deposits that are not returned until the end of the tenancy and any deductions against the deposit when returned will be classed as income. Any monies not used to cover services or repairs and is returned to tenant is not included as income

Being a property investor overseas

If you have both UK and overseas rentals, it is important to deal with them separately. You will have two property rental businesses – One for UK properties and one for overseas properties. Losses arising on an overseas property cannot be offset against the UK property and vice versa.

Understanding the property allowance as a property investor

In its simplest form the property allowance provides for full relief from income tax if an individual’s relevant property income (turnover, not profit) in the year is less than £1000. Not only does that mean there is no income tax to pay, but also no need to register with HMRC or file tax returns providing your property income is below this threshold

The property allowance is not deductible for income from:

• employment
• a partnership where you or someone associated with you are partners
• a company owned or controlled by you or someone associated with you

You are also not eligible to use property allowance if you

• deduct expenses from income by renting a room in your own home, rather than availing Rent a Room Scheme
• claim the tax reducer for finance costs (such as mortgage interest for residential property)

What documents do you need to keep for property income?

• Rent Invoices
• Receipts for rent collected
• Banks Statements showing where the money from rental income is deposited
• Mortgage interest certificates
• Expense receipts and invoices
• Documents from accounting tools

Getting it right

Good record keeping, as a property investor is essential to ensure that not only that all sources of income are considered, but also that any income received is allocated to the correct property rental business.  By law, you are required to retain records for six years for the end of the tax year.  

So do you need to register for Self-Assessment for your property business? Let us take the hassle away and do it for you. Save you time by filling out the form below and we will be in touch

Want help with being a property Investor? We have years of experience talking and working with property investors helping them start their fledgling businesses to looking after large property incorporations.