It’s that time of year again and the tax return deadline looms. If you’re organised and you have all your paperwork in order, then completing your own tax return or sending off an organised file to your accountant for them to complete your return should be a doddle.
Please note, this article is intended as a general guide only and is not a definitive statement of the tax rules – seek professional advice before making or not making decisions.
Whichever way you do it, pen and paper, on a spreadsheet or using one of the specialised accounting and /or property management software packages, keeping on top of your finances should be a top priority.
The final deadline for submitting your tax return online (and paying any tax due) for each financial year is the 31st of January, so in this case you are submitting figures for the 2018-19 tax year, year ending 5th April 2019. The deadline for submitting on paper is in the past, which was the 31st October 2019.
Depending on the size of your operation, as a landlord you could be involved with all these different taxes listed below. Bear in mind there are constant changes with tax rules, almost every Budget brings a new set of rules, so expect to do some research unless you use an accountant. These are the main taxes affecting landlords:
- Income Tax (rental income from property is included, but for HMRC purposes it counts as investment income, not earned income)
- National Insurance contributions (NICs)
- Corporation Tax – if the property is owned by your own company, then the company pays Corporation Tax
- Capital Gains Tax (CGT)
- Stamp Duty Land Tax (SDLT)
All landlords, or anyone earning income from property, must register for a Self-Assessment Tax Return, and complete the property income section of the return. Income Tax and any NICs due are currently paid annually based on the income you receive from renting out properties and any additional earned and unearned (investment) income.
Your UK property company will be liable to pay Corporation Tax on its profits from rental lettings at the prevailing rate, currently 19%. HMRC requires a company to register for Corporation Tax within three months of starting to trade.
From 6 April 2020, all non-UK resident companies that carry on a UK property business, or have other UK property income, will be charged Corporation Tax rather than being charged Income Tax. This measure is designed to deliver more equal tax treatment for UK and non-UK resident companies in receipt of similar income.
SDLT is payable on purchase and in the case of a buy to let (second home)there is a 3% surcharge.
CGT applies when you make a gain on the sale of a property, the gain being the difference between the purchase price and the sale price having taken into account both buying and selling costs and any capital expenditure made during the period of ownership. It is very important to keep records of all these items in a property file because the period between purchase and sale may be many years.
From April 2020 new capital gains tax rules are due to come into operation which if implemented as expected will mean (1) a tighter payment deadline with just 30 days to pay after the sale completion as opposed to the current system of waiting until the following tax year, and (2) changes to Private Residence Relief (PRR) will apply where the exemption period is reduced from 18 months to 9 months of the last period of ownership of a second home.
The PRR changes have a knock on effect for Letting Relief because, for those who qualify for PRR, (if you lived in the sold rental property as your main residence) it might be possible to claim letting relief to reduce the capital gains tax owed by up to £40,000, or £80,000 for a couple.
Currently, letting relief can be claimed if you used to live in the property you are selling and have also let out part or all of it, but when the new rules apply from April 2020, landlords will only be able to claim this relief if they lived in the property when it is sold.
The Self Assessment process is similar for landlords as for small business owners and sole traders and is relatively easy to do online once you have registered for Self Assessment.
You’ll receive your UTR (unique taxpayer reference) number, which is assigned to you when you register and is usually on all your tax communications from HMRC. It is needed when you file your return and in all correspondence with HMRC.
To simplify somewhat, to complete your tax return all you need to know is your total income from property and all the deductible expenses for the tax year in question, 6th April to 5th April.
The expenses you are allowed to claim are determined by HMRC, they can get complicated and some can change from year to year, so professional advice here is preferable – you don’t want to claim more than you are allowed as penalties my result.
As a rough guide and these are by no means definite, the main allowable expenses in renting are:
- Accounting fees
- Running costs
- Property repair and maintenance costs
- Replacement of domestic items (from April 2016)
- Service charges
- Ground rent
- Cleaning costs
- Advertising costs
- Letting agent fees
- Light and heating costs
- Wages for hired help and other services
- Phone calls, stationery
- Travel costs wholly in connection with the rentals.
If you have a mortgage on your rental property, then you can claim some of the interest payments against income tax, but this is being restricted, this being phased in over four years:
Since April 2017, tax relief on mortgage interest payments is being phased out. By April 2020 this will not be deductible. Instead a tax-credit is allowed, based on 20% of your mortgage interest payments. This is allowance hits higher-rate taxpayers hardest, who were effectively receiving 40% tax relief on mortgage payments under the old tax rules. The new system is being phased in over several years. For the tax year 2018-2019 you can only claim for 50% of your mortgage interest payments and from April 2020 onwards all mortgage interest will only receive the tax credit.
Note: if you have neglect to report any rental income to HMRC in the past you should make a point of informing them of your oversight through their Let Property Campaign – link below. HMRC is currently targeted residential landlords. Failure to disclose can result in high penalties and even a criminal prosecution.