11:08 AM, 28th October 2010, About 13 years ago
Many property owners are confused over whether they should declare the money they earn from letting.
Here’s a list of some of the most common misconceptions about making a tax return:
The tax rules apply to ‘property’ not just homes. Property is considered bare land, which is land without any buildings; all buildings, including farms, factories, holiday lets and shops, not just homes, and even covers letting permanently sited caravans or houseboats.
Holiday parks and marinas letting caravans or houseboats are not included as different tax rules apply.
Making a tax return does not depend on if you make a rental profit.
The taxman wants to know if you receive income from property. If you do, then you must declare this income on a self-assessment tax return.
Filing a tax return with a loss registers that loss with the taxman. That means in future years, a property investor can set off that loss against profits to slash the amount of tax they pay.
For example, a landlord has a £7,500 loss in year 1 of buy to let trading, a £3,000 loss in year 2 and a £2,500 profit in year 3.
In year 3, he brings forward accumulated losses of £10,500.
Losses are matched against first available profits, so £2,500 is balanced off, leaving the investor no tax to pay in year 3 and £8,000 losses to carry forward against future rental profits.
The landlord will pay no tax on rental profits until every penny of those losses are used.
Refurbishment expenses fall in to two categories – capital and revenue.
Capital expenses are generally one-off costs like building an extension or installing heating if none was present.
Revenue expenses are repairs and renewals, like exchanging one bathroom suite for another or fixing some missing tiles on the roof.
Capital expenses are set off against capital gains tax on disposal of a property, while revenue expenses are set off against rental income as allowable business expenses.
Selecting the right category for an expense is not optional – tax rules and case law lay down the framework. It is not possible to set off capital expenses against rental income or vice versa to manipulate how much tax is paid.
Incorrectly allocating expenses can lead to misrepresentation of profits or losses on a tax return.
Tax rules say every one who owns or has an interest in a property must make a tax return.
Generally, an owner is anyone who receives income from the property or proceeds from a disposal.
The taxman will assume husbands and wives who jointly own property have 50:50 shares unless ownership is tenancy-in-common and each holds a specific share, like 60:40 or 70:30; or a formal declaration is on the couple’s tax file.
Anyone who enters in to any business arrangement that generates rent or other income from a property, even if it’s just a single transaction, must declare the income on a tax return.
That covers someone who rents out a second home for just a week or few weeks a year.
This could cause tax and legal problems if the property is a house in multiple occupation (HMO).
The rent-a-room scheme does not cover this type of let and the property may well require a licence from the local council.
HMOs are governed buy the same tax rules as other letting property.
Tax rules say a UK resident taxpayer is obliged to report their worldwide income to HM Revenue and Customs via a self-assessment tax return.
The owner must make the tax return, not an agent or third party managing a property on their behalf.
The agreement with you to manage the property is the same as an agreement with a letting agent – the owner still has to account for their income and you have to account separately for what you earn for managing the property.
It’s not your choice when to submit a return. If you have rental income for the year or part year starting April 6, 2009 and ending April 5, 2010, then you have to file a tax return by January 31, 2011 or face fines and penalties.
If you have undeclared rental income from before April 6, 2009, you must also declare that as soon as possible. If you owe tax on any undeclared income, you will also have to pay interest accruing daily.
Failing to make a tax return when one is due or making errors or omissions about income and expenses can lead to fines and penalties.
Just remember that if you are in a mess with your property business accounts and tax returns, the best course of action is to deal with the problem. Sticking your head in the sand just makes things worse in the long run.
If you would like further advice on tax or accountancy please call The Money Centre’s Customer Care Team on 01603 894525 and we will be delighted to refer you to our Joint Venture Tax Partners who specialise in property taxation. The initial introduction is a no cost no obligation service.