Tax advice for landlords

‘Tax doesn’t have to be taxing’ – or so they say – but there will still be a need for tax advice for landlords.

While the government has made it more difficult for landlords to make a profit from their rental property in recent years, landlords can still enjoy various allowances and expenses to reduce their overall tax bill.

Let’s face it, landlords will incur expenses whether it’s the cost of finding new tenants, paying letting agent fees or having their rental property cleaned thoroughly between tenancies.

However, the rules for landlords can be fairly complex and there may be a need to seek expert accountancy advice to ensure that they not only remain within the rules but make the most of the allowances.

The expenses of maintaining and running their property

Landlords can claim the expenses of maintaining and running their property and these will include:

  • Landlords’ insurance
  • Service costs including cleaning and gardening
  • Letting agent fees
  • Legal fees
  • Accountancy fees
  • Council tax and utility bills for when the property is empty
  • Advertising costs for new tenants
  • Rents, service charges and ground rents.

This is not an exhaustive list, which is why you should seek the advice of a good accountant.

One of the biggest issues for landlords seeing a drop in profits was the changes the government brought in to the wear and tear allowance.

If the property that you let is fully furnished, then previously you could claim for the wear and tear on the furnishings including the carpet, cooker and beds.

However, the rules now make it clear that a landlord can only claim tax relief on anything they spend replacing what is termed as a ‘domestic item’.

So, landlords cannot claim tax relief on how much they spend on furnishing a property for the first time with appliances and furniture.

The tax relief is only allowable when an item is being replaced and will no longer be used within the rental property.

Landlord news outlets play a crucial role

One of the issues for landlords is keeping abreast of the changes to tax rules and regulations which is why landlord news outlets play a crucial role.

Also, there are landlords’ associations that will keep their members abreast of any issues affecting them, particularly over taxation.

It’s understanding how much tax a landlord must pay that will help them run a profitable concern without falling foul of HMRC regulations.

It’s always best to contact HM Revenue and Customs to tell them you have a rental property – it’s also likely that they will find out at some point anyway.

So, if the rental property income is between £1,000 and £2,500 a year, then you must contact HMRC.

Should the income be between £2,500 and £9,999 after a landlord’s allowable expenses, then you must complete a self-assessment tax return.

If the rental income is less the £1,000 a year, then there is no tax to pay and you don’t even have to register with HMRC.

It’s important to appreciate that the rules can be complex and while there are exclusions, it’s always best to have an ‘honesty is the best policy’ approach.

We mentioned that HMRC may find out at some point and they have a ‘Let Property’ campaign running which is targeted at landlords since they are making efforts at targeting those with undeclared property income.

Under the Let Property campaign, HMRC can go back up to 20 years before a landlord makes contact and issue penalties of up to 100% of the tax due.

For those landlords who offer to make a disclosure, then they face a 20% penalty which can make a huge difference.

Regular landlord updates

As mentioned, one of the best things about regular landlord updates is that landlords will offer a safe and secure home for tenants and do so legally.

In the 2019/2020 tax year, then the profit you make from renting out a property is considered to be part of your income – so it is subject to income tax.

Essentially, your property rental income is added to your total taxable income to calculate how much tax you should pay.

This means for basic rate taxpayers the rate is 20%, while higher rate taxpayers will pay 40%. Those who are in the additional tax bracket will pay 45%.

However, if you are a landlord in Scotland then you may have to pay a different rate of income tax to other landlords in the UK.

Landlord tax relief

Finally, the budget changes announced by the government for landlord tax relief means that the scheme is being gradually phased in after it was brought in in 2017.

So, over four years, all financing costs that are incurred by a landlord will be given a basic rate tax deduction from the 2020/21 tax year.

For many landlords, the impact on profitability has led many of the amateur landlords and those with just one property to contemplate leaving the sector, but there is a crucial role to play when it comes to tax advice for landlords because you’ll need to pay the right amount on your rental income to avoid HMRC penalties.

About S Thompson

Simon Thompson is Chairman of the Landlord Syndicate and CEO / Co Founder of Accommodation for Students Ltd.

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