Landlords are entitled to many tax allowances, provided they are actively letting out the property. However, according to Leaders – the independently owned letting specialists, it’s not uncommon for landlords to pay too much tax because they miss out on their entitled allowances.
Leaders’ managing director Paul Weller said: “Landlords should bear in mind that they are permitted to make certain deductions from their rental income before calculating profit, although these deductions are only applicable when the property is being let or is available for letting.”
This article will help you understand what records you need to keep to ensure you can take full advantage of your available allowances.
Understanding your taxable obligation
Any profit made from letting a property is subject to UK income tax, whether the landlord is resident in the UK or not, and must be reported, in most cased, by submitting a Self-Assessment Form. However, in some case you can include your taxable income from property as an adjustment to your Pay as You Earn (PAYE) tax code.
If you complete a Self-Assessment form
For the 2009-10 tax year, if your total income from UK property is under £68,000 a year before expenses, you can group the expenses as a single total on your tax return. If it’s £68,000 or more, you’ll need to show your expenses separately.
Your Tax Office can ask to see your records at any time. So hold onto the detailed information even if your income’s less than £68,000.
If you don’t complete a Self-Assessment form
If you’re employed and your taxable income from property is less than £2,500, your Pay As You Earn (PAYE) tax code can be adjusted to collect the tax on your property income. Your Tax Office will send you form P810 to report your income each year.
However, you’ll still need to keep records, to enable you to fill in form P810. Your Tax Office can also ask to see your records to check your figures.
If your income from rent is £2,500 or more you’ll need to complete a tax return.
What financial records do you need to keep?
If you let out residential property you will have to keep records of rent received and your expenses to work out the profit you’ll pay tax on. You work out your taxable profit by taking your expenses and certain allowances away from your rental income.
Allowable deductions include the cost of:
- Mortgage interest on loans used to purchase the rented property or to fund improvements
- Your agent’s letting and management fees
- Repair and maintenance of the property and contents (but not the cost of improvements)
- Ground rent and maintenance charges on leasehold property
- Water and sewerage rates unless charged to tenants
- A wear and tear allowance applicable to furnished property only, equal to 10 percent of the gross rent received (less council tax and water rates) or you can deduct the cost of replacement from the rental income in the relevant tax year
- If you pay someone to assist with the work involved in letting your properties, the cost is allowable if you can prove that they are paid at local commercial rates and they report the income in their own tax return
- Council tax whilst the property is vacant
- Accountant’s fees
- Legal expenses (but not those relating to the purchase or sale of the property)
- Stamp duty on tenancy agreements
- Building and contents insurance and any insurance claim fees
- VAT on all charges where applicable
To qualify for the wear and tear allowance, the property has to be furnished sufficiently to meet the ‘eat, sit, sleep’ rule; i.e. sufficient and appropriate furniture and furnishings must be provided for all rooms.
These would include any records that show your property is safe to let out.
Other costs not mentioned above may be allowable if accurate records are kept, but landlords would need to discuss the details with their accountant or the Inland Revenue.
In the case of landlords who are resident abroad for more than six months in any tax year, they are generally classified as non-resident landlords but income tax is still payable.
Weller added: “If the tax affairs of non-resident landlords are up to date, they can complete an NRL1 form, which your letting agent should provide, to apply for exemption from having tax deducted from your rental income at source, although the income is still taxable and must be reported in the self assessment tax return.”
How long do you need to keep the records?
You’ll need to keep your records for six years after the tax year to which they apply – whether you complete a tax return or not.What records do I need to keep if I’ve purchase or sold a let property within the tax year?
If you sell or dispose of a property that’s not your main home and its value has increased since you acquired it, you may have to pay Capital Gains Tax (CGT). Some of your property costs can be deducted when working out your gain, so you’ll need a record of:
- When you bought or acquired it
- When you sold or disposed of it
- The purchase and sale price
- Any buying and selling costs, like Stamp Duty and legal fees
- Improvement costs and dates
You may qualify for other reliefs or allowances depending on how long you’ve owned the property and if it was ever your main home.
If you have a single lodger, this will not affect your entitlement to relief when you sell your main home but they must live as part of your family. If you have more than one lodger, you will be treated as letting part of your home and might have to pay some CGT.
If the property was used for a furnished holiday letting business there are special CGT reliefs.
As a landlord, taxes are just one of the many things you’re responsible for. To maximize your taxable allowances, consider asking a question. We’re ready to help.