self-assessment

Recent tax changes to rental property

Changes in allowances for rental properties  

Over the last few years the Chancellor has made some deep cuts into the benefits of a BTL landlords.

 

  1. 36 month rule reduced to 18 months effective since April 2015. Only allowable if landlord lived in the property.
  2. Capital Gains tax payable for overseas landlords on gains in the UK effective since April 2015
  3. 10% Wear & Tear allowance withdrawn for furnished properties effective from April 2016. You can only claim general wear and tear allowance based on the actual cost of any capital items.
  4. Interest relief to be capped at the basic rate for the taxpayer. Taper over 4 years from 2017
  5. Additional stamp duty payable on BTL of 3% on stamp duty rates. Plus lower threshold of £40K , when purchasing own home minimum threshold remains at £125K.

 

Only piece of good news, Rent a room allowance increased from £4,250 to £7,500 from April 2016.

 

Dispensations

A dispensation is a notice from HMRC that removes the requirement for the employer to report certain expenses and benefits at the end of the tax year on forms P11D or P9D. There is also no need to pay any tax or National Insurance contributions on items covered by a dispensation.

Once granted, dispensations last indefinitely. However, HMRC can review them to make sure that the conditions under which they were issued still apply.

A dispensation includes routine business expenses and benefits. There is no defined list, though the main expenses routinely covered by a dispensation are:

  • travel, including subsistence costs associated with business travel
  • fuel for company cars
  • hire car costs
  • telephones
  • business entertainment expenses
  • credit cards used for business
  • fees and subscriptions

For a company to apply for a dispensation, there must be some basic systems in place. At a minimum this means someone, other than the employee who is claiming the expenses, has to check that the:

  • amount claimed isn’t excessive
  • the claim doesn’t include disallowable items

If it is not possible for you to operate an independent system for checking and authorising expenses claims – for example, because you are the sole director of your company and you have no other employees – you will only be able to obtain a dispensation if you:

  • ensure all expenses claims are supported by receipts for the expenditure
  • demonstrate that the claim relates to expenditure that can be covered by a dispensation – your receipts may be sufficient for this purpose, but if not you must retain additional information

Dispensations can be applied for either in writing or online

Rental property declarations

Do you own property or land that is rented out, or are you intending to “buy to let”? You’ll need to complete a Self Assessment if you receive any of the following:

  • Rental income and other receipts from UK land and/or property
  • Income from letting furnished holiday accommodation in the UK or European Economic Area (EEA), you may also have to complete the equivalent return in the country where the property is; the rules here are a bit more complicated so watch out
  • Premiums arising from leases of UK land
  • An inducement to take an interest in any property for letting

Accounts should be completed to the 5 April. On the basis that it’s not a huge income generator, complete the income statement on a receipts and payments basis, known as cash accounting.

If a property is let jointly, the income can be split between each of the partners, everyone needs to complete a Self Assessment. If the partners are married or in a civil relationship, it is assumed the split is 50/50. If this is not the case complete a “Declaration of beneficial interest in joint property and income".

What can be claimed?

If you rent a room in your home you are able to claim “Rent a Room” relief up to £4,250 without having to retain any receipts.

 If the total income from this sort of letting is more than £4,250 you can choose between:

  •  
  • paying tax just on the excess over £4,250 (or £2,125 if let jointly) without taking off any expenses
  •  
  • calculating your profit from letting in the usual way. You may want to do this if, for instance, you have made a loss. In which case these are the expenses that are allowable.

 

Types of allowable expenses

1.Property expenses

  • Any rents you pay under a lease of a property
  • Rates
  • Council Tax
  • Water charges, not paid by tenants
  • Ground rents
  • Insurance for both the property and its contents
  • Costs of services you provide such as gardening, porterage, cleaning, communal hot water, etc.
  • Insurance against loss of rents is also an allowable cost, if you claim under your insurance policy any money you receive should be included as income

 

 

2.Loan interest and other financial costs

  • The costs of obtaining a loan or an alternative finance arrangement to buy a property that you let
  • Any interest on such a loan or alternative finance payments.

 

3.Expenses that prevent the property from deteriorating

 

4.If you are not claiming capital allowances see below, you can claim the costs of replacing furniture, furnishings and machinery supplied with your property.

 

5.Legal, management and other professional fees:  management fees paid to an agent to cover rent collection, advertising and similar administrative expenses can be deducted.

 

6.Other allowable property expenses such as stationery, phone, business travelling and other miscellaneous costs.

 

7.Capital allowances: You can claim tax allowances, called capital allowances, for the cost of purchasing and improvements see my separate blog on this

 

8.10% writing down allowance on furnished lets

 

9.You may also be entitled to a 100% first year allowance if you have bought certain energy-saving technologies used in the property rental business. They are available for the purchase of designated energy-saving and water-efficient technologies

 

10.You may also be able to claim 100% allowances for converting empty or underused space above shops and other commercial premises to flats for renting.

 

 

A couple of final points:

 

Private use adjustment – if expenses include any amounts for non-business purposes

Personal expenses are not allowable as a deduction

 

For furnished holiday lets and EEA lets, the rules are more complicated.

Do you need to complete a Self Assessment?

All income is taxable, it maybe a revelation but true. Many times I’ve heard people say they don’t think they have to submit a self assessment and quote numbers, these are the rules from HMRC. “If you are an employee or a pensioner and already pay tax through a PAYE code, you can sometimes ask for tax that you owe on income, such as savings and property, to be collected through your code number. You'll need to complete a tax return instead if the income you receive is:

  • £10,000 or more from taxed savings and investments
  • £2,500 or more from untaxed savings and investments
  • £10,000 or more from property (before deducting allowable expenses)
  • £2,500 or more from property (after deducting allowable expenses)

If you don't pay tax through a PAYE code you’ll need to complete a tax return if all of the following apply:

  • you have income to declare, for example income from savings, trusts or abroad, rental income from land or property
  • your total income exceeds your total allowances and reliefs
  • you have tax to pay on this income”

So who or when do you need to submit a self assessment?

  •    Self-employed
  •   Company director, minister, Lloyd's name or member
  •   Annual income is £100,000 or more
  •   Income from savings, investment or property
  •   Claim for expenses or reliefs
  •   You or your partner receive Child Benefit and your income is over £50,000

The new High Income Child Benefit tax charge, introduced on 7 January 2013, may mean you need to complete a Self Assessment tax return for the first time. You must complete a tax return if all of the following apply:

  1. your income is over £50,000 a year
  2. you live with a partner and your income is higher than theirs
  3. you or your partner are entitled to receive Child Benefit (or get an equivalent amount from someone who claims Child Benefit for a child who lives with you)
  4. you jointly decide to keep receiving Child Benefit and pay the new tax charge
  •   Over 65 and receive a reduced age-related allowance
  •   Receive get income from overseas
  •   Income from trusts, settlements and estates
  •   Capital Gains Tax to pay
  •   Lived or worked abroad or aren't domiciled in the UK
  •   Trustee

Don’t forget that if you are submitting a paper self assessment it must be received by HMRC by midnight on the 31 October. There is talk this is being phased out, so watch the press for updates.

The onus is on the taxpayer to inform HMRC, it’s not when they’re caught. If HMRC catches up with a taxpayer they are less likely to be sympathetic to their plight