Accounting for your property
The first blog in our property series looked at tax considerations of running a property business and your personal filing requirements as a landlord.
We will now look at the accounting for your property business and allowable expenses for tax.
What income do I need to declare?
To determine your taxable profits on which you will be taxed, it is important to understand tax accounting. When accounting for property income and expenses you will likely be required to use the ‘cash basis’ method rather than the previously required ‘accruals basis’ method.
- Cash basis means that you account for income received and expenses paid in the tax year regardless of the period they relate to.
- The accruals method requires you to account for income and expenses due, but not necessarily paid, in the tax year i.e. rent due in March 2019 but not actually paid until May 2019 would be taxable in the 2018/19 tax year. Therefore it is necessary to recognise money owed and owing (debtors and creditors) and expenses relating to different accounting periods.
All landlords need to use the cash basis, unless you make an election to use the alternative method, or you meet certain conditions. For example, if rents are more than £150,000 or the property business is carried out by a company or a partnership. Cashflow and expenses should be considered when decided to make an election to use the alternative method.
MHA Tait Walker can provide more information on the conditions if required.
What expenses can I claim?
When you work out your taxable rental profit, you can deduct allowable expenses from your rental income. The expenses must be wholly and exclusively for the purpose of renting out the property so you can’t claim for personal expenses.
Anything of a capital nature i.e. putting a new roof on the property, is not allowable either. The main deciding factor in determining if an expense is capital is if it is a ‘like for like’ replacement or an enhancement to the property.
Capital expenditure can be a contentious area; something one person deems to be an improvement may actually be allowable for income tax. A good example of this would be a new kitchen to replace an old kitchen. The materials may appear to be an enhancement or improvement, but this is merely because of modern equipment used where there is no alternative. If the new kitchen is of the same standard, size and layout as the old kitchen, the incurred costs will likely all be allowable. If you were extending the kitchen and upgrading the style then this would likely be capital expenditure and not allowable for income tax.
Capital costs will be taken in to account when the capital gain is realised on the sale of the property.
Types of expenses
Maintenance & Repairs
Maintenance and repair expenditure are typically the most common expenditure, and the definition of a repair is simply restoring an asset back to its original condition. This can sometimes mean replacing items. For example, replacing a broken door, this would be classed as an allowable maintenance and repair cost.
A point to note is should you have a landlord insurance policy in place covering the cost of some repairs to the property, expenses can only be claimed on additional repairs not covered by your insurance.
Replacement of domestic items relief
‘Replacement of domestic items’ relief replaced the ‘wear & tear’ allowance and is available to all landlords of residential property, regardless of whether their property is furnished or not (previously you could only claim ‘wear & tear’ on furnished lettings). It applies to moveable furniture, furnishings, kitchenware and household appliances, and allows you to claim a deduction against your tax liability equivalent to the cost of the replaced item.
Mortgage Interest Relief Restriction
On 6th April 2017, HMRC introduced new restrictions on mortgage interest relief on residential properties. As an individual landlord, mortgage interest is now restricted to basic rate (20%) income tax reducer and this will be phased in over four years from April 2017 as follows:
|Year||% of costs deducted from profits||% of costs available as a basic rate deduction|
This has had a major impact on the tax landscape and the way investors are now approaching this change.
Legal and professional costs
Accountancy fees relating to the property business can be claimed as an expense against your rental income.
Insurance policies relating to the property business are allowable against income.
This list is not exhaustive, so please contact us if you are concerned about claiming other expenses.
At MHA Tait Walker, we have vast expertise and specialists in this area who can answer any queries you may have and help you make the correct decision. Please contact Ryan Keltie on 0191 285 0321 or email firstname.lastname@example.org.
In our final blog of the series we will discuss owning a property through a company or as an individual.
Issue 13 of our Construction & Real Estate newsletter series with MHA is available now! We have worked with MHA to provide a national outlook on the issues facing the construction and real estate sectors.
Issue 13 contains articles on the following:
- Recent UK property tax changes
- VAT Domestic Reverse Charge
- Employment status and off-payroll workers
- Minimum Energy Efficiency Standards
- Tenants fees
- House price growth
Some key information is outlined in the publication:
MHA Real Estate Matters – Issue 13
Please click below to view the full publication.
The new VAT “domestic reverse charge”
What is happening and when?
The new VAT “domestic reverse charge” (DRC) goes live on October 1st 2020 and it is the most significant change to VAT in construction services in 30 years. From that date, sub-contractors in a CIS chain of supply will cease to collect VAT from other contractors. In its place a reverse charge system will apply. This makes the buyer of the sub-contractors service liable for VAT accounting in place of the supplier.
Why the change?
It is now widely known that HMRC are implementing the change to combat VAT ‘missing trader’ fraud in the sector which is estimated to cost the Treasury £100m per annum.
Which services will the DRC affect?
The scope of the new legislation is wide and based on the definition of “construction operations” for CIS purposes. It encompasses construction services and associated goods supplied by contractors working on the construction, alteration, repair, extension or demolition of buildings and civil engineering works.
Please click the link to our flyer below for more information.
Original content sourced from MHA member firm MHA MacIntyre Hudson
You may be thinking about purchasing a buy to let property and have already considered the following:
- Local market
- Finance arrangements
- Tenant targets
- Rental yield
- Capital growth
- Insurance (building and landlord)
- Legal fees
However, have you considered the following tax consequences of a buy to let property?
Stamp Duty Land Tax (SDLT) in England and Northern Ireland
SDLT is due on all property purchases at the standard rates shown below. However in April 2016 new rules were introduced meaning landlords pay an extra three percentage of SDLT on each band when they purchase a buy-to-let property.
|House Price||Standard Rate||Buy to Let / Second Home Rate|
|Up to £125,000||0%||3%|
|£125,001 – £250,000||2%||5%|
|£250,001 – £925,000||5%||8%|
|£925,001 – £1.5m||10%||13%|
The additional SDLT rates can make a substantial difference to the standard rates, particularly if the property purchase price is high.
For example, should you purchase a £200,000 buy to let property the total Stamp Duty payable would total £7,500, this is broken down as follows:
|Up to £125,000||3%||£3,750|
|£125,001 to £200,000||5%||£3,750|
|Total Stamp Duty Due||£7,500|
In addition, married couples or civil partners are seen as one unit by HMRC for SDLT. Therefore if a husband owns a property and his wife buys a property, the additional rates for a second property would apply even though they legally own the properties separately.
SDLT is not due in Scotland and Wales, an equivalent tax is due in those countries. Land and Buildings Transaction Tax (LBTT) is due on property purchases in Scotland and Land Transaction Tax (LTT) in Wales. You can find the rates on the relevant government websites.
The deadline for reporting and paying the SDLT on a purchase of a property in England or Northern Ireland is now 14 calendar days. If this deadline be missed – penalties will apply. The period for paying LBTT on properties in Scotland, or LTT for purchases in Wales is 30 calendar days.
Value Added Tax (VAT)
VAT is not due on residential properties however if you were to buy a commercial property you may be liable to 20% VAT on the purchase price of the commercial property.
Expert advice should be sought if you are considering buying a commercial property. We have a specialist team at MHA Tait Walker who can assist you with any queries you have.
An area commonly overlooked, but one of significant importance, is your personal requirements once you’ve purchased a buy-to-let property.
In purchasing a second property, and receiving rental income, you’ll meet HMRC’s guidance on who needs to complete a tax return. The only exception to this rule is if the rental income you receive in the year is less than £1,000.
Registering for Self-Assessment
You will need to register for self-assessment by 5 October following the end of the tax year you started receiving rental income e.g. 5 October 2019 for a property first rented during the tax year 6 April 2018 to 5 April 2019. By registering you’re making HMRC aware you need to complete a tax return. If this is done incorrectly you may be required to complete a tax return for an incorrect year.
Once HMRC have processed your application you will be issued with a Unique Taxpayer Reference, otherwise known as a ‘UTR’. This is a 10-digit reference you need to complete your tax return.
What are the Self-Assessment deadlines?
You submit tax returns for tax years, not calendar years, and you do this in arrears.
For example, for the 2019/20 tax year, running 6 April 2019 to 5 April 2020, you would:
- need to register for Self-Assessment by 5 October 2020 if you’ve never submitted a return before
- submit your return by midnight 31 October 2020 if filing a paper tax return
- submit your return by midnight 31 January 2021 if filing online
- pay the tax you owe by midnight 31 January 2021. Sometimes you will be required to make interim payments on account towards your future liabilities.
Failing to meet one or more of these deadlines, you will be liable to HMRC’s strict penalty charges.
How can we help?
In our next blog of the property series we will discuss how to account for rental income and expenditure and what expenditure is allowable for tax purposes.