Paying tax is not an option for buy-to-let landlords. This short eBook, which has been written by our recommended tax and accountancy partners, is an excellent guide for landlords who have yet to file a tax returnMake Text Bigger
Paying tax is not an option – there’s not a box on a self-assessment form for ‘no publicity’ or to cancel your annual payments to HM Revenue and Customs.
The rules say that if you earn the money, then you must pay the tax, but you can manipulate the rules to make sure you do not pay a penny more than you should.
The trouble is a lot of property investors fail to observe these basic rules and fall foul of the taxman.
The result is hassle, wasted time, and forking out unnecessary fines and penalties when the taxman eventually calls you to book.
Property investors do come as the good guys that present their accounts in good order and complete a tax return for filing in good time every year.
But instead of the bad and the ugly, others are branded as newbies who have only just bought or rented out their first buy-to-let or holiday let and are unsure of the tax rules and old-stagers, who are property investors who have let property for two or more years but never made a tax return for one reason or another.
You know which one of these you are!
The good guys generally don’t have a problem with the taxman. The newbies and old stagers might if they don’t follow the rules.
Tax rules for newbie property investors
For the newbies, the tax rules are simple.
A property business starts on the first day a tenant starts paying rent – just repeat ‘starts paying rent’ – not when the property was bought or a tenant moves in.
The date a tenant starts paying rent is generally the start date of the tenancy agreement.
If a tenant starts paying rent from September 1, 2009, then your first tax year for a property business runs from September 1, 2009 until April 5, 2010.
The jargon is ‘date of first letting’ for the day the property business starts, and in this case, it’s September 01, 2009.
The next tax year runs from April 6, 2010, until April 5, 2011, and so on until the date when the last tenant moves out.
If costs were incurred to make the property ready for rent before the date the first tenant started paying rent, then they go in the first tax year’s accounts on the date of first letting as if the money was spent that day.
Property investors who have never made a tax return
The answer here is to sort out your tax affairs and to put them right quickly.
Honesty is the best policy with HMRC – and putting your hands up and admitting a mistake goes a good way towards an amicable settlement.
Tax inspectors are paid a bonus related to how much ‘lost’ tax they recover, so once they sink their teeth in to your case, they are unlikely to let go if they think you are worth money in their pocket.
Taxpayers also pay interest at a daily rate on any tax they should have paid in earlier years plus penalties and surcharges for failing to make tax returns.
Those that come clean immediately win discounts on these penalties of around 30% and treatment that is more lenient from a tax inspector.
If you have unsettled tax affairs, it’s in your financial interests to sort them out.
The taxman has ever more sophisticated technology at his disposal to ferret out non-payers. If he finds you before you try to resolve your tax affairs, expect a tough time.
I don’t make a profit, so I don’t have to fill in a tax return
Wrong! The rules are based on earning income not making a profit. That means if you earn rental income, you should make a tax return.
Some thresholds apply, like tax returns must be submitted if a property investor earns £10,000 or more from gross rents (that’s before deducting any business costs) in a tax year or £2,500 or more as net property income (after deducting business expenses) in a tax year.
But the basic reason landlords should submit a tax return if they make a loss is to make sure those losses are recorded by the taxman so they can be set off against future profits.
For instance, a property investor makes a £5,000 loss in the first year of trading and a £2,800 profit in the following tax year can wipe out those profits against the previous year’s losses and pay no income tax on rental income.
The balance of £2,200 is then carried forward again to set off against the next available rental profits.
Submitting tax returns
Now is the time to start pulling together all the information required for a tax return.
Turnaround times for letters to a tax office are running at about eight weeks and going back to a lender or letting agent for financial information can take weeks as well.
Making an enquiry now means the information might not be available until October, and then blank out two weeks at Christmas for holidays and all of a sudden, that January 31 deadline is not far away.
A personal tax reference is also required to submit a return online and these can take some weeks to arrive as well.
If you would like further advice on tax or accountancy please call The Money Centre’s Customer Care Team on 01603 894525 and they 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
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