Tax and Property Questions and Answers
UK Property Tax Specialists
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Tax return forms are available free of charge from HMRC. We are independent accountants and not part of or affiliated to HMRC. We remove the stress and anxiety of preparing your tax return by completing and filing your tax return for you. We shall help you to pay the least amount of tax by advising you about the expenses which you are entitled to claim.
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Should I Tell The Tax Man That I Let Out Property ?
In short.. Yes.. If you already complete a self assessment tax return, you need to complete the
Property Income pages. If you have not completed a self assessment return in the past, you have a statutory duty to disclose the new source of to HMRC before the 5th October following the end of the tax year ending on 5th April. If you fail to notify or disclose the income on time, you could be liable to a penalty or in extreme cases to prosecution.
In any case common sense should tell you that if you have a source of income that HMRC are not aware of (apart from tax exempt savings and ISA's) then not declaring it, if later discovered, may be looked on as evasion.
How Will The Tax Man Know If I Am Renting Out Property ?
A good question. HMRC has far and wide reaching powers and resources, perhaps best illustrated by the following articles recently published in the national press and highlighting some of the ways HMRC "catch" landlords who have not declared their rental income.
The Guardian 29/05/07
The Times 12/07/09
How do I work out how much tax I have to pay, I have rental income of £600 per month and my salary is £25,000 per annum?
On the basis that the property is held in your sole name, any net rental income is taxable on you. If however the property is owned jointly, any income arising will be split between you and your partner (usually this would be split 50:50) and taxed on you both individually. (Please see our article on who should own the property)
Also on the basis that the rent received of £600 per month is gross (before deduction of allowable expenses).
Any expenses of a revenue nature incurred in relation to letting your property may be deductible from your gross rents received before arriving at your taxable rental income.
Some examples of deductible expenses are as follows, although these are by no means a complete list:
Repairs and maintenance
Letting agents fees
Electricity/gas/water/council tax where paid on behalf of the tenant
Property and contents insurance
Wear and Tear allowance (furnished properties only)
If you incur allowable expenditure which exceeds the rents you receive, you will not have any income tax to pay. In fact, the letting of your property will give rise to an annual loss which can be carried forward and offset against profits that may arise in future years.
By way of example, say the property is owned in your sole name, your only other income is employment income of £25,000 per annum and your taxable rental profits (after deduction of expenses) are £100 per month (£1,200 per year). You would be a lower rate tax payer and tax of approximately 20% will be payable in respect of your rental profits, which in this example would be £240.
You may wish therefore to consider setting this amount aside to ensure that you have sufficient funds to pay your tax bill. If your income levels are higher, you may be a higher rate tax payer and your effective rate of tax may be more than 20%.
I want to buy a property in Spain. If I let it out how will I be taxed?
The income tax treatment of rents received from property situated abroad is almost identical to the treatment afforded to rents received from UK property. The only distinguishing factors are the way that the income is reported on the Self Assessment Tax Return and that any losses arising can only be offset against income received from other overseas property, rather than being aggregated with income from property situated in the UK.
Therefore and in accordance with the usual treatment of property income, you will need to prepare annual accounts detailing all income and outgoings for the tax year in question and any net profit will be charged to UK tax at your marginal rate (although any equivalent Spanish tax which you are required to pay will be deducted from the final tax bill).
Can I set off renovation costs I incurred prior to letting my property out?
A very good question and one which we get asked a lot. In the situation where you buy a property and then carry out renovation works, the tax treatment of expenses such as mortgage interest, utility bills, insurance etc is allowable. The position on the tax treatment of renovation costs pre letting however is more complex. Much depends on the condition of the property when you purchased it. HMRC would argue that if you purchased a run down property you would have paid less for it in the first instance and thus any renovation works carried out would be looked on as capital improvements and therefore not available to set off against rental income. Instead these costs should be added to the purchase price and included as part of the cost of the property.
It's a complex area and much depends on the circumstances. Get in touch and we'll steer you in the right direction.
I am leaving the UK to take up a work offer abroad and I want to let my property. Do I still have to file a tax return?
A number of issues arise. Firstly, the length of time you will be abroad will determine whether you are resident or non resident. Generally if you leave the UK for employment which is both full time and expected to last for at least one whole tax year, you will generally be considered non-resident.
However, whether you are resident or not, as the property is in the UK you remain within the scope of UK Income Tax on any rental profits. You should also note that if you are actually non-resident for less than five complete tax years, any gains you make on properties sold whilst abroad will be taxed in the year you return unless you acquired those properties after you became non-resident and sold them in a tax year you were non resident and before the tax year in which you return. If you are away from the UK for more than five complete tax years, any gains should be outside the scope of Capital Gains Tax. Be careful in the tax year of departure or return, because you might be caught!
In addition if your ‘usual place of abode’ will be outside the UK for a period of six months or more, you will be categorised as a non-resident landlord and as such, your letting agent or tenant will be required to deduct basic rate tax from rental income (net of certain deductible expenses) prior to you receiving it.
If you wish to continue receiving UK rental income gross whilst you are abroad, you should submit Form NRL1 to the HMRC Centre for Non-Residents. HMRC should then grant approval for rents to be received gross. You rental profits will still remain taxable in the UK and you will still need to file tax returns, but this will help with cash-flow. .
You also need to confirm the tax reporting requirements in the country where you will be working.
I have heard that you can split the ownership of a property which is jointly owned and save tax. Is this right?
In certain circumstances, yes. Ownership can vary and before you consider going down this road it would be wise for you to consider the following:-
Types of ownership by individuals (England and Wales only)
This is where a property is owned in one individual’s name and the income and capital gains are chargeable on that individual. Income and gains cannot be shared with a spouse or civil partner for tax purposes.
Joint ownership (Joint tenants)
This is where the whole property is owned jointly and if one of the joint owners dies then the property automatically vests with the remaining owners. The interest in a jointly owned property cannot be left in a will until the last survivor becomes sole owner. Because the individuals are entitled to an equal share in the whole of the income and capital gains, they are shared equally and no election can be made for a different split of income. Therefore beware. When buying a property in joint names with friends say, make sure you check with your solicitor that you have common ownership as tenants in common. See below.
Common ownership (Tenants in common)
This is where effectively a proportion of the property is owned by an individual. This may be equal or it may be in different proportions. If one of the tenants dies then his/her share goes into their estate and is dealt with by the will or according to the rules of intestacy. If the property is owned in different shares and the owners are not married/civil partners then the income and gains are divided in proportion to the ownership. In the case of married couples/civil partners, the income is treated as shared equally (whatever the beneficial ownership) unless they both make a declaration confirming the actual split of income based on the beneficial ownership of the income and the property. The gain would follow the beneficial ownership.
Given The Above Here Is How to save Capital Gains Tax
If one spouse owns a property in their own name, it would be an idea to transfer the property into joint names before a sale assuming that the other spouse has not already used their CGT exemption in the tax year concerned. Care does need to be taken as if this is carried out shortly before a sale, then HM Revenue and Customs may attack the transaction as invalid under anti-avoidance rules. You also need to ensure that any income received in the period after transfer of the property is declared on each spouse’s tax return which may increase the income tax paid. There would also be the costs of conveying the property into joint names.
What does "fully furnished" mean? I want to claim the 10% Wear and Tear Allowance.
A fully furnished property is defined by HMRC as one that is ‘capable of normal occupation without the tenant having to provide their own beds, chairs, tables, sofas and other furnishings, cooker etc.’
Thus if you fully furnish the living room and master bedroom but only supply the kitchen with an oven and a few plates and some cutlery it would not be what constitutes fully furnished.
Instead, if the fully furnished requirements are only satisfied in part, the 10 per cent wear and tear allowance is not available and from 6th April 2013, you will only be able to claim for repairs. You will not be able to claim items which are capital replacements. Prior to 6th April 2013, you were able to claim capital items under the renewals basis.
Unfortunately, there is no scope to claim the wear and tear allowance at a reduced, comparable rate.
For a more detailed answer please see our article on what is a fully furnished house.
What expenses can I deduct against my rental income?
A very common question to which we have provided a seperate detailed article. A must read for any landlord big or small.
Allowable expenses against rental income.
Can I claim tax relief on the costs or a property deal that fell through ?
In short... No.
Can I avoid paying Capital Gains Tax if I move abroad?
This is a complex area of tax and generally far more complicated than is realised. Much has been written on this subject and the following is a general view of the rules. Seek professional advice before you decide to pursue this route.
In summary however, non-residents who are not ordinarily resident in the UK are not generally liable to Capital Gains Tax, but see the exception below.
A person is resident in the UK if his visits to the UK exceed 183 days in any one tax year. There is now a Statutory Residence Test. Please see our article on the Statutory Residence Test.
A person who has been resident or ordinarily resident in the UK for any part of four or more out of the last seven years and who then becomes non-resident or not ordinarily resident for a period of less than five years will be liable to Capital Gains Tax on the disposal of the assets they owned before they left the UK. So one would need to plan disposals a long way ahead.
In the 2013 Autumn Statement on 5th December 2013, the Chancellor announced that gains on residential properties in the UK would
be taxable on non-residents after 5th April 2015 but only on gains arising after that date. There are no further details at this stage and
there will be a consultation during 2014.
A disposal after emigration from the UK but before the following 5th April may be subject to CGT.
Generally therefore, (and we stress the word generally) if you are non-resident for a minimum of 5 years you may not have to pay Capital Gains tax.
Can I offset my rental losses against other income?
Not normally. Generally losses on a rental income business can only be carried forward to offset against future profits from your rental income business. If the loss arises from surplus capital allowances on commercial lettings or from certain agricultural expenses, you may be able to claim the losses against your other income.
Can I let a property to my daughter at a reduced rent?
There is nothing to stop you letting out a property to a connected person or anyone else for that matter at whatever rent you wish to charge. However if you are renting the property at below the market value you cannot set the losses against other rental profits and can only carry the losses forward to set against rental profits earned from the same tenant.
Can I claim for my time doing DIY renovation and redecoration work?
In short...No. However, the cost of materials is clearly deductible. The cost of travel to the property should also be allowable, provided the only reason for your trip is in respect of the property and its future rental. However, you cannot deduct anything for the time you spend working in the property.
Send us your questions and we'll add it to the list if it's not already answered
© Thandi Nicholls Ltd 2014 All Rights Reserved - The above articles are provided for guidance only and may not cover your personal circumstances so you should not rely on them. It is important that you seek appropriate professional advice which takes into account your personal circumstances where you can provide the full facts of the case and all documents related to your case. Thandi Nicholls Ltd t/a uklandlordtax.co.uk, K Nicholls FCA or S Thandi cannot be held responsible for the consequences of any action or the consequences of deciding not to act.
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