Date posted: 11th Jun 2019
We have many discussions with potential clients who have misunderstood the rules in relation to the declaration of rental income. Many think that they aren’t required to declare rental income if they haven’t made a profit or if their personal allowance is available to cover any rental income received.
However, unless rental income is less than £1,000, landlords must declare the rental income to HM Revenue & Customs (“HMRC”) and pay tax on any profit made by the property rental business. The declaration is made by completing a Self-Assessment Tax Return.
The profit is calculated by deducting allowable expenses (see below). However, where it is beneficial to do so, the landlord can claim the property allowance of £1,000 and deduct this instead of actual expenses. This will work in the landlord’s favour where actual expenses are less than £1,000 (unless there is a loss to preserve).
To calculate profits (or losses) accurately, the landlord must keep records.
For all properties in the property rental business, a record should be kept of:
- the dates on which the property was let
- rental income received
- any income from services provided to tenants (for example if the landlord undertakes maintenance or repairs and bills the tenants for this)
- any other income, for example from the sale of domestic goods for which replacement relief is claimed
The landlord should also keep supporting documentation, such as rent books, invoices and bank statements.
The landlord will also need to keep a record of expenses. Expenses can be claimed to the extent that they relate wholly and exclusively to the letting out of the property.
Examples of expenses which typically may be incurred by a landlord include:
- agents’ fees
- advertising costs
- repairs and maintenance
- replacing domestic items
- landlords’ insurance
- mortgage interest (see below)
The landlord should keep a record of all expenses incurred, and supporting documentation, such as invoices, agents’ statements, bank statements, receipts, etc.
Where the property allowance is claimed instead, the landlord does not need to keep records of actual expenses. However, it is useful to do so in order to check whether claiming the allowance is beneficial, and also from a business perspective.
The deduction available for mortgage interest for 2019/20 is 25% of the total interest paid. The remaining 75% is given as a 20% tax credit against your income tax liability for the year. There are numerous effects of this, which should be discussed with us.
In addition, there may be further restrictions to the mortgage interest claimed, where not all of the mortgage monies were used to purchase the property. It is worth noting however, that even if the mortgage is not secured against the actual rental property (for instance if you borrowed against your home to buy the investment property), that relief for some of the mortgage interest is still available.
In addition, if you pay an accountant to prepare your tax return, then there will be some relief for the fees paid, against the rental income.
Individuals who have moved overseas and receive rental income, are obliged to continue declaring the rental income to HMRC. In addition, those non-resident landlords should register with HMRC as a non-resident landlord otherwise the tenant or letting agent would be obliged to deduct 20% income tax from the rental income.
In addition, those non-residents that subsequently sell a UK property, must declare the sale of the property to HMRC within 30 days of the sale as part of a non-resident’s capital gains tax return. This point is very often overlooked.
Method of keeping records
At the moment, the landlord can keep their records in the way that best suits them. They may prefer to use a software package designed for this purpose, a general accounting package or spreadsheets. Alternatively, they may prefer to keep manual records. What matters at this point is that adequate records are kept and will stand up to HMRC scrutiny if need be.
Looking ahead to Making Tax Digital
When Making Tax Digital for income tax purposes is rolled out to landlords, they will need to keep digital records and upload information up to HMRC quarterly via a digital account. The start date has yet to be announced, but at the time of the 2019 Spring Statement the Chancellor confirmed that it would not be introduced until April 2020, at the earliest.
If you have any queries regarding rental income, please give us a call.