Self assessment tax return help for Landlords
Buy to Let Landlord’s tax explained. I need to declare my rent income. How do I register? What expenses am I allowed to claim? Is it difficult completing a tax return online? How much tax will I have to pay?
These are important questions that need to be answered if you want to avoid problems with the tax man. This guide sets out the basics for getting your tax affairs in order and filling in your self-assessment tax return.
Tax penalties were increased last year, so filing your tax return promptly and getting it right first time is more important than ever. After all, in these difficult times, everyone should be aiming to avoid wasting their hard-earned cash on hefty penalties.
YOUR TAX RETURN GUIDE
Registering with HM Revenue & Customs
Selecting the right form
If you believe you need to complete a tax return, you must inform HMRC. You will need to complete form SA1.
Most HMRC registrations can now be done online on their website.
To register for Self Assessment and receive a tax return to complete, please click on the link below:
The information required in this form is fairly straightforward, such as full name, date of birth and address. You will also need your National Insurance number.
If you’re completing the registration process using paper forms, the address that you need to send them to once complete can be found on the form. You should always keep a copy of the form and note the date that you sent it.
If you are moving abroad but are going to rent out your old home, or any other UK property, it is important to realise you remain liable to UK tax on those rents and will still need to complete self assessment tax returns.
You will also need to consider if you want to register for the Non Resident Landlords’ Scheme. If you do not register, your tenant or letting agent will deduct tax from the rent you are due to get. You then claim to offset this tax against any tax owed on your self assessment return.
HMRC will send you a confirmation of registration and provide you with your unique taxpayer’s reference, or UTR. This is a unique reference for your tax affairs. You should quote this on any payments you make or any correspondence to HMRC. They will also ask you for this or your National Insurance number if you ever phone them with a query.
The basics of the tax return
A tax return should disclose your taxable income and gains for the relevant tax year. A tax year starts on 6 April and ends on the following 5 April. Also note that all of your taxable income and gains must be declared on a tax return – even if they have been taxed before you received them ( or ‘taxed at source’), such as employment income or bank interest.
Submitting the tax return
Following the end of the tax year, tax returns must be submitted to HMRC. You can submit your return on paper; this must be done by 31 October following the end of the tax year. Alternatively, you may chose to file your return online, in which case the deadline is extended to the 31 January, following the end of the tax year.
Failing to file your return on time will result in an automatic £100 fine, with further penalties depending on the length of delay. Last year, the penalty rules changed. Previously, if the tax you had to pay on 31 January was less than £100, then your penalty would be reduced to whatever was owed. But this has been scrapped and the £100 penalty is now fixed and automatic.
Paying any tax due
Any tax you owe must be paid by or on the 31 January following the end of the tax year. There are a number of ways you can pay HMRC, such as Direct Debit, Bank Giro, online banking etc.
As mentioned above, income that has already been taxed must still be declared on your tax return. However, the tax already paid at source will be deducted before arriving at the final tax bill.
Be aware that if your tax liability is over £1,000 or not much of your tax is collected at source, you may be required to make an instalment for next year’s tax as well on 31 January. Again, delaying paying HMRC could cost you interest and late payment penalties.
Landlords should keep their records and documents for six years in case HMRC want to examine them in the future.
HMRC is not very precise about the format of records a business should keep. They are indifferent as to whether you should use a manual cashbook or sophisticated bookkeeping programme. Many of our registered clients simply add up their receipts and enter their total transactions directly on to our online forms, within their secure client space on our website, we then use the information to complete their tax returns. Some prefer to upload their spreadsheets to their client space on our website. We have a dedicated document storage facility for this.
When starting out, you may want to begin with simple spreadsheets, or a basic book to record your income and expenses and very quickly you should be able to identify what format your business needs for record keeping.
Other sources of income
If you have other sources of income, these are the sort of items you need to keep:
• Bank interest certificates
• Dividend vouchers
• Portfolio statements
• P45s/ P60s from pension providers or employers
• P9Ds/ P11Ds from employers
• Notifications regarding any state aid such as the State Pension or Job Seeker’s Allowance
• Paperwork regarding pension schemes being paid into
• Receipts for donations made under the Gift Aid scheme
• Paperwork for any assets you have sold, such as shares, land etc.
• Income and expense receipts for any land or property you received income from- in the UK or overseas
Again, this list is not exhaustive, but hopefully it gives you a good idea of the type of paperwork it is necessary for you to keep and which will be required for the completion of your tax return.
Claiming expenses against your rent income
Below is a comprehensive list of the most common expenses buy to let landlords can claim.
You can deduct certain expenses from the total rental income. The tax you pay is based on the rental income figure after deduction of expenses. You may only deduct expenses that are the result of letting out the property. There are special rules for some types of expenses – especially property repair costs.
Any rent or ground rent you have to pay
Fees you pay to a letting agent
Legal fees on renewing short leases (but not when they are first made)
Interest you may pay on a loan to purchases the property (new rules apply)
Mortgage arrangement fees charged by the lender (see notes below)
Other loan interest directly related to the business may be allowed.
Cost of gas safety certificates and similar requirements
Electricity, gas and water (unless you already get this back from the tenant)
Repairs & maintenance (special rules apply – see notes below)
Wear and tear allowance (if the property is furnished – see notes below)
Use of Home as Office (see notes below)
Advertising for tenants
Sundry other expenses excluded elsewhere
Notes regarding expenses
The main property expense for most people is the mortgage payment. You can only claim relief on the interest part of the mortgage payment. If you have a repayment mortgage, the repayment part of any payments does not qualify for relief. This means that the mortgage interest may be less than the full monthly repayment you make, as your mortgage repayments may include repayment of capital.
If you remortgage the property to withdraw equity or secure the loan on a different property you may still be able to get relief for the interest but you should seek further advice as this is a complicated area.
New rules from 5 April 2017.
When the last chancellor George Osborne announced the change, he implied that the extra tax would hit only higher-earning landlords.
It’s true that every mortgaged landlord who pays 40% or 45% tax will indeed pay much more under his proposals.
But some basic-rate taxpayers will also pay more tax – because the change will push them into the higher-rate bracket.
At the heart of the change is landlords’ future inability to deduct the cost of their mortgage interest from their rental income.
In other words, tax will be applied to the rent received – rather than what is left of the rent after the mortgage interest has been paid.
Here is a worked example assuming the landlord pays 40% tax.
What happens up to 5 April 2017
Your buy-to-let earns £20,000 a year and the interest-only mortgage costs £13,000 a year. Tax is due on the difference or profit. So you pay tax on £7,000, meaning £2,800 for HMRC and £4,200 for you.
In tax year 2020/21
Tax is now due on your full rental income of £20,000, less a tax credit equivalent to basic-rate tax on the interest. So you pay 40% tax on £20,000 (ie £8,000), less the 20% credit (20% of £13,000 = £2,600), meaning £5,400 for HMRC and £1,600 for you. Your tax bill has therefore gone up by 93%. The new rules will be phased in from April 2017 to April 2021
Mortgage arrangement fees charged by lender
Mortgage arrangement fees also qualify for relief if paid up front or added to the cost of the mortgage. The above new rules also apply.
The treatment of repairs and improvements
Ongoing repairs to the fabric and structure of a let property are expenses which can be deducted from your rental income. Examples of such repairs include:
- exterior and interior painting and decorating,
- damp and rot treatment,
- mending broken windows, doors, furniture and machines such as cookers or lifts,
- replacing roof slates, flashing and gutters.
But you cannot deduct expenditure on improvements, or expenditure needed to bring a property up to standard before the first letting. Expenditure on improvements can be added to the costs of the property and may reduce any capital gain when you sell the property.
The dividing line between improvement and repair can be difficult to judge. For example, if the windows needed replacing in the property you own, but you replaced single glazed windows with double glazed windows, is this a repair or an improvement, or a bit of each? In cases like this, you will be allowed the normal ‘modern equivalent’ – so double glazing is accepted as a ‘repair’ and you can deduct all the costs against your rental income.
Where there is a significant element of improvement – such as you replace the kitchen:
Conveniently, HMRC consider kitchens in PIM2020 and present three scenarios for the refurbishment of a fitted kitchen. Assuming that the dimensions of the kitchen remain unaltered:
- Replacement with a similar standard kitchen, which counts as revenue and is allowable.
- Replacement with a new kitchen of the same standard, but with changes such as additional cupboards or extra equipment, which equates to a reasonable apportionment, with the “add-ons” treated as capital not allowable.
- The substantial upgrading of the whole kitchen, for example with high-quality materials and fittings, where the whole expenditure will be capital.
If you are letting a furnished property, and it has sufficient furnishings for the tenant to be able to live there without providing anything more, you are allowed a deduction of 10% of the gross rent for the cost of the furnishings and equipment.
The wear and tear allowance
PLEASE NOTE: For furnished property the Wear and Tear Allowance was abolished on 6th April 2016, it has been replaced with a new repairs and renewals basis, this means on the actual cost of repair or renewing an item can be claimed. This will apply to all rental property whether furnished or unfurnished.
KWA tax returns online – Our service
The thought of having to complete a Tax Return can be quite a daunting task as well as time consuming. For just £99.00 (after tax relief £79.00) we can prepare and file your Tax Return for you without any fuss. Simply provide us with the information we ask for then leave the rest to us.
This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayers’ circumstances do vary and if you feel that the information provided is beneficial it is important that you seek professional advice before implementing.. If you take, or do not take action as a result of reading this article, we will accept no responsibility for any financial loss incurred.