Taxation of 7 months rent in advance?

Taxation of 7 months rent in advance?

16:23 PM, 28th January 2021, About 8 months ago 25

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I have a problem – it sounds like a nice problem. My agent has got me a short term let for 7 months and the tenant wants to pay 7 months rent in advance. The problem is that this tax year I am a 40% taxpayer, but next tax year definitely only a 20% taxpayer.

As I do my accounts on a cash basis I will end up paying 40% tax on all this income in spite of only 2 months of it belonging to this tax year.
My agent suggests just paying me two months rent to start, hanging on to the money, and then paying me each month during the next tax year. (Agent is big national agent who I trust).

However, I feel sure I have read on HMRC website somewhere that if you use an agent to collect your rent then you are deemed to have received the money on the same day that the agent receives the rent from the tenant.

I have searched without success for over an hour on the internet for this topic on the HMRC website which spells this out very clearly. Can anyone advise me on this topic please and/or give a link to HMRC web page?

Many thanks

David



Comments

by john glynn

10:21 AM, 29th January 2021, About 8 months ago

I would be extremely wary of prospective tenants offering to pay seven months rent in advance. From experience they usually do this because they have a hidden agenda and want to keep the landlord at arms length. I know of two landlords who fell for this scam. One tenant paid twelve months in advance then turned the property into a cannabis farm. The cost to rectify the damage afterwards was off the scale. The other tenant paid six months in advance then stopped paying the rent. He knew full well it would take months and months to evict him and that the landlord would never be able to recover his arrears. It transpired that this tenant had previous form for this type of scam but the Letting Agent never picked up on it. Personally I would be extremely wary of this type of tenant and find another that pays monthly. It could save you a lot of trouble in the long run and would also solve your tax dilemma.

by Olls63

10:53 AM, 29th January 2021, About 8 months ago

From HMRC Property Income Manual 1094

Agents may take payments for rent on behalf of a landlord. For example, a residential landlord may use a property management company to collect rental payments, or a person with a furnished holiday letting business may list their property on a website that facilitates card payments on behalf of the owner.

If a landlord uses an agent to collect payments and calculates the profits of their property business under the cash basis, income will be recognised when it is paid to the agent and not when the agent passes this on to the landlord.

If the agent fails to pass on any payments, the income must still be recognised when it was paid to the agent.

by Mike

11:20 AM, 29th January 2021, About 8 months ago

I would contest this rule, cash accounting means cash accounting, that is money in your bank and not in someone else's . Quite frankly I will only declare actual income that you receive from your agent, I once had an agent who was paid 6 months rent in advance, I was not told of this and my agent was passing me rent for each month, the only way I found this out was when the oven went wrong and my tenant informed me that please get him a new oven as there is no excuse for not doing so as he has paid 6 months rent upfront!

by Martin

11:23 AM, 29th January 2021, About 8 months ago

Firstly I agree with John and I'm always wary of large upfront payments since a rental property next door to one of mine was turned into a cannabis farm. In hindsight it was obvious, remote landlord, overgrown garden and curtains always drawn. So now if I get that, I schedule regular inspections, including one at the end of the first month.
As for the Tax implications surely at most you are talking a few thousand here.
Is there not a deductible cost you could incur to offset that?
Any outstanding maintenance, refurbishment of your office or even overpayment or advance payment of the mortgage (if you have one). As previously stated income is recognised when it is paid to the agent not the landlord.
I'm sure any half reasonable accountant will have a work around.

by paul kaye

11:37 AM, 29th January 2021, About 8 months ago

I agree with many here.Do not take on a tenant paying in advance.It will lead to problems later.
I have been through a court case with a tenant wanting to pay 3 months up front.
It turned out she was getting divorced and had a settlement to pay the rent.
THEN ran out of money! it took me over 5 years to get my rent at £50 month !!
never ever fall for it!

by Seething Landlord

11:52 AM, 29th January 2021, About 8 months ago

This is not really a question of tax law but more to do do with the legal relationship between agent and principal. Whatever the agent does on behalf of the principal has in general terms the same effect as if the principal had done it himself.

However, the question illustrates one of the drawbacks of using the cash basis. We had a similar situation soon after switching from using the traditional accounting basis and resolved it by declining the offer of 6 months rent in advance and putting the same applicants on a standard contract with monthly payments instead. I believe that it would have been possible to switch back to using the traditional accounting method but in our case after switching once to simplify our accounts and having gone through the transitional stage it would have been a sledgehammer to crack a nut.

by NEIL T

12:06 PM, 29th January 2021, About 8 months ago

It may go against the grain for some, but my profits are split between my wife and I, so if we see that we're going into the higher tax bracket then we simply donate more to our favourite charities. Thus dropping us down into the lower bracket and at the same time helping others out in greater need.

by Rennie

13:52 PM, 29th January 2021, About 8 months ago

I am not qualified in any way but this is what i have heard. If your tenant pays your agent 6 months rent and the agent drip-feeds it to you by the month then the money not yet paid to you is a deposit and has to be protected and the deposit has to be messed about with each month in order to pay you.

If your tenant pays you directly 6 months rent up front then the agreement is a 6 monthly rent payment with a notice period to match the rent payment i.e.6 months. It doesn't really matter at the moment as it is going to be way over 6 months to get an eviction order but in normal times (if we ever get back there) you would only have to give 2 months notice

by Graham Bowcock

16:14 PM, 29th January 2021, About 8 months ago

I have had a few tenants who have paid a good chunk of money up front and had no problems. It all comes down to understanding why and doing due diligence. I need to know the background.

As for timing of payments, when your agent gets the money it's your money. It is not the agent's money and should always be held in a clients' account, clearly identifiable as yours.

When there is agreement for rent to be paid other than monthly, the tenancy agreement must state the correct period of payment. I am staggered (but not for the first time) that some landlords posting here have not received money from their agent that the tenants have paid, with the agent dripping it out monthly. That is just wrong. If the deal is 6 months rent, the tenancy must state that. The tenant must pay that. the agent must hand it over in full.

Deals for rent in advance that are not properly documented risk the landlord falling foul of deposit regulations.

by silversurfer2017

16:25 PM, 29th January 2021, About 8 months ago

Hi since posting I have managed to find the link.
https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim1094
if you look towards the end of the article under 'Amounts Paid to Agents on Behalf of the Landlord' it clearly states that rent received by a letting agent is deemed to have been received on the same date by the landlord. It even refers to accounting on a cash basis.
I do take your point about having several months rent in advance. We were caught out once. A family's house was damaged in a fire and their insurance company offered to pay us 6 months in advance to house them so we took the money. The problem was the family did not respect the property, after all, it was not their money paying for it. The walls were badly marked, the oven was never cleaned. The two eldest boys continually played football in the back garden and several fence panels needed replacing. The day of reckoning did come when they realised that although they had been living there rent free their deposit was at risk. There was a lot of haggling - they denied any damage of course. We got some money from them but not enough - just glad to get rid of them in the end.
This case is quite different, and elderly couple who live abroad with dual nationality. They are flying back again to the UK quite soon, hotel quarantining of course, and they are definitely not cannabis growers and in any case in a semi-detached house I feel sure the neighbours might notice. The property is ideal for them as it is close walking distance to shops and restaurants. We have got around the payment tax problem by having just 2 months up front and monthly thereafter.

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