In this blog, we look at 7 tax “sins” and explore the best way to mitigate any future problems.
Splitting rental income incorrectly
Spouses who jointly own property need to take great care when splitting their rental income between them on their tax returns. If you jointly own a rental property with a spouse, apart from an exception mentioned below, then you must declare half the profits on each return. This is the case even if you hold specific percentages that are not 50:50.
If you need to go back and correct the position, normally one spouse will have tax to pay, and the other may get a refund for any tax paid. HMRC will usually go back up to 6 years to assess the spouse who owes more tax. The spouse due the refund will, however, normally only be able to go back 4 years, leaving a possible 2 year period where both spouses are taxed on the same income.
As previously mentioned, there is a way that HMRC will recognise a split in ownership that differs from the default 50:50 position. This is through a Form 17 declaration, and this must be in place before the different split can be recognised. It is worth pointing out that there are a few exceptions here, such as this not being relevant to properties held as furnished holiday lets.
Not doing a Tax Return
Ignoring your responsibility to file a tax return will normally result in unnecessary penalties and interest, not to mention the stress of a HMRC enquiry in some cases. Whilst this may be a surprising entry in our list, it is astonishing how common this has been in recent years, supported by the sheer sum of money recouped by HMRC under their Let Property Campaign. New landlords should notify HMRC that they need to do a return within 6 months of the end of the tax year they start receiving rental income (i.e. by 5th October).
A big misconception we often hear is that there is a mythical £2,500 threshold, and that if your rental profits are less than £2,500 (and gross rental income is less than £10,000), then you do not need to pay tax. Whilst there may be a possibility a tax return does not need to be filed, that does not mean the rental profits are not taxable! In this instance, you will need to contact HMRC to let them know you have made rental profits and they will tax you accordingly, often via a PAYE Code adjustment. The £2,500 is not a freebie!
The capital cost issue
A common error is recording capital costs as repair costs to reduce income tax, when instead they should be deducted as part of your capital gains tax calculation on property sale. There are a lot of different types of costs which can be classed as capital costs, such as improvements to a rental property, stamp duty, and conveyancing fees.
On the flip side, some genuine non-capital costs are being missed out of the property pages of your tax returns. For example, a replacement bathroom suite could be classed as a genuine repair, rather than a capital cost.
Mortgages – remember how to apply the new rules!
Whilst it has been a long time now since the Section 24 began to be phased in, there are still many landlords who do not fully understand how the changes affect them. Apart from the standard rules we have covered in past issues, many do not realise that it is a finance cost restriction rather than just a mortgage interest cost restriction. This means costs such as arrangement fees and mortgage broker fees are included within the property pages of your tax return, but subject to the same restrictions as mortgage interest.
Another point to remember, is that this applies only to standard residential lets; those letting commercial property and/or furnished holiday lets may still deduct all their mortgage interest and the initial finance costs from this source of income.
Trading & Developing
If you buy a property with the intention to “do up” and sell, rather than let, the profits on sale are treated as trading income. This means income tax is paid as opposed to capital gains tax. As the capital gains tax rates are lower than income tax, if you make an error in the treatment and it is investigated by HMRC, additional tax will ordinarily be due, plus any interest and penalties.
Not keeping the records to back up your tax return
If HMRC ask, can you provide evidence of the expenses you incurred? Landlords should keep invoices, receipts and other relevant records ordinarily for 22 months (a year from 31st January following the tax year end.)
However, if you incur a capital cost (a new conservatory for example), the tax relief is given on sale of your rental property. These records should therefore potentially be kept a lot longer.
And finally, if HMRC deem you have failed to keep appropriate records, there is a potential fine of up to £3,000 per tax return in question.
If you are a UK resident, you are taxed on your worldwide rental income. So do not assume that your overseas rental income is just taxed overseas and omitted from your UK tax return. You will be able to get some relief for any income tax paid in the property’s country, so this will negate the impact of paying tax twice.
If you have already made any of the mistakes above, we can help you to correct things in the past and review your tax position moving forward.
For any of your property tax needs, please do not hesitate to contact RITA4Rent today on Freephone 0800 1 22 33 57 or via email by clicking here.
- We recommend all professional landlords protect themselves and their business by gaining access to advice, information and education from a landlord association. Become a member of the Residential Landlords Association (RLA) today and join over 35,000 other landlords, just like you. Click here to become a member of the RLA today.
- Given the sheer level of tax changes in recent years, it might also be a good time to review your mortgage position. Please note we are not authorised to provide advice or arrange mortgages but we can introduce you to a firm who can. If you wish to discuss your policies or receive advice then please contact us and we will pass your details onto RLA Mortgages who are authorised and specialise within this area.
- propertychecklists.co.uk has been set up by Which? property author Kate Faulkner and offers checklists on everything from how to choose a buy to let through to securing tenants, letting them go and day-to-day management. If you have a question and want an independent answer, they will also help with that too – all free of charge!
- Finally, it can also be a great help communicating with like-minded landlords, learning about their experiences, and having a chat. You can do just that by heading over to Property Tribes today, the busiest forum for private and residential landlords in the UK.