Landlords are among the taxpayers who need to submit their self-assessment tax return by 31 January. Getting it right is crucial to avoid issues and reduce the bill where possible – accountancy firm BDO says HMRC is “homing in” on residential landlords, so better safe than sorry.
First, make sure you are declaring all your income accurately. If you rent out a residential property, you must pay tax on the profit you make after deductions for ‘allowable expenses’. This also applies for holiday properties, both in the UK and abroad, although furnished holiday lettings enjoy additional tax advantages compared with standard residential properties.
Since full tax relief on mortgage interest was replaced by a 20 per cent tax reduction, landlords in the higher and additional tax band have been looking for ways to mitigate their tax bills. Transferring properties to a limited company is one of the options, but it has its pros and cons.
One of the potential downsides is that if you incorporate a rental property into a company, you will typically have to pay capital gains tax (CGT) on the transaction. HMRC has been targeting people who did so in 2017-18 without declaring gains with a “nudge” letter, Blick Rothenberg says. Heather Powell, head of property and construction at the firm, suggests that those who have transferred their properties to a company in the following years should also review their circumstances, because they could be receiving a letter next.
“The nudge letters currently being issued are not as emphatic in stating that UK taxes are payable, but give a very good indication that HMRC believes buy-to-let landlords may be under-declaring taxes due, and that they have them ‘in their sights’,” she explains.
Some buy-to-let landlords will have recently sold properties, perhaps off the back of the increase in mortgage costs. When you sell a residential property, you need to complete a land return and pay any tax due within 60 days; but if you also do a tax return, you need to include it there, too, with details of the payment reference for any tax you have already paid.
Given that buy-to-let investing has become less tax advantageous, you should make the most of the tax reliefs that are still available. The list of allowable expenses that you can deduct from your rental income to work out your taxable profit is pretty long, including maintenance and repairs, insurance, bills if you pay for them yourself, letting agent fees, accountant fees and costs of services such as gardeners and cleaners. But you cannot claim for improvements to the property, which are considered capital expenditures – although you may be able to deduct improvement costs when you sell the property and have to work out your gains for CGT purposes.
If your rental income before expenses is £1,000 or less, you do not have to pay taxes on it. If the income is higher but your allowable expenses are less than £1,000, you can claim a flat rate £1,000 property allowance deduction instead of the various expenses. Finally, if you let a furnished room in your home, the “rent a room scheme” lets you earn up to £7,500 per year tax-free. But you cannot claim both rent-a-room relief and the property allowance for the same property income.
