Frequently Asked Questions

Q1: My accountant has told me I need to make payments on account towards a future tax liability. My last tax return was an unusually profitable year. Is there anything I can do?

If you are one of the many landlords who face "payments on account" in January and July towards a future tax liability, remember to consider HMRC form SA303. Where taxpayers expect a drop in rental property profit year on year, form SA303 can be filed to reduce the payments on account.

Q2: Can I claim mortgage broker fees as an allowable deduction against rental income?

HMRC refer to this situation in a number of areas; one example simply being the SA105 notes, which states the property pages of your self assessment tax return should include "the costs of getting a loan or an alternative finance arrangement to buy a property that you let."

Therefore, if you incur mortgage broker fees, make sure you include these against rental income on your self assessment tax return.

Please note, this will begin to be restricted from April 2017 onwards due to the rule changes regarding finance costs.

Q3: In which tax year does the sale of my property fall?

The tax point when selling a property is the date contracts are exchanged.

If you are thinking of selling a property soon and the new PPR rules make no difference to your circumstances, and there is quite a fair amount of capital gains tax to pay, consider arranging to exchange contracts on 6th April 2014. This way, the tax point will fall in the 14/15 tax year, and CGT will not have to be paid until 31 January 2016.

If for instance, with this same property, contracts were exchanged on 5th April 2014 or earlier, the tax point would fall in the 13/14 tax year, and CGT would need to be paid by a year earlier, by 31 January 2015.

Q4: What are the Inheritance Tax implications if I gift a property?

There is a long answer and a short answer to this! Making lifetime gifts of assets, whether they be cash, property, stocks and shares etc is an effective way of reducing the potential Inheritance Tax payable on death.

You can give away unlimited amounts every year without there being an immediate inheritance tax charge. These are potentially exempt transfers, and provided you survive for a period of seven years from the date of transfer, the value of the assets will fall out of your estate entirely and not be subject to Inheritance Tax. Care, must be taken, however, when transferring property or other tangible assets, e.g. shares, as such transfers may give rise to capital gains tax liabilities.

Q5: How do I treat tenancy deposits on my self assessment tax return?

As you are no doubt aware, the two most common deposit types are holding deposits and security deposits.

We are often asked how these types of deposits should be treated, and what tax implications they have on your self assessment tax return.

First of all, security deposits. These are usually taken by landlords from tenants at the start of a tenancy. The purpose of the deposit is to provide "security" cover against future implications facing the landlord, such as potential repairs at the end of a tenancy, final cleaning costs, withheld rent by the tenant and so forth. These deposits are usually between one and two months worth of rent up front.

So, we are asked, how is this deposit treated? Is this income to be added to your tax return? The answer being, not now, but perhaps maybe in the future. The deposit paid, held in a tenancy deposit protection scheme, remains here until the end of the tenancy. Assuming the landlord does not need to make good any tenant damage, or cover unpaid rent etc, then the deposit is returned to the tenant. In this case, there is no income generated by the landlord, and no additional income needs to be reported on your self assessment tax return.

However, things become different if the landlord needs to retain the deposit, or an element of the deposit value. If this eventuality occurs then the treatment on your self assessment tax return changes. At the date the landlord receives the amount from the deposit, this serves as the tax point for self assessment purposes. Therefore, if a landlord received the deposit back to cover expenses on 19th December 2013, this would fall in the 13/14 tax return year.

What is important though, is that as the landlord incurs expenses to repair the property using the deposit funds, likewise, these expenses can be claimed on your self assessment tax return.

Even more important, is that if the costs incurred by the landlord exceed the deposit kept, then these costs should also be reported on your self assessment tax return. As an example, if a landlord retained a £1,000 security deposit, then incurred £900 in repair costs, and £300 in cleaning costs, even though the costs exceeded the deposit, all three amounts would be reported on the self assessment tax return, providing the landlord with a tax benefit.

The second most common deposit type is holding deposits. In the early stages, these are sometimes paid by tenants to landlords to "hold" a property, and take it off the market, thus showing their commitment to the property and intention to sign the tenancy agreement in due course. Unlike security deposits, these do not have to be protected, but we will not go into the legal definitions here as you will no doubt have a good understanding of this area. However, we are asked how these are treated for tax purposes.

Similarly to the security deposit, if the monies are returned to the tenant in full, or if they are transferred to a security deposit, then no further action is required on your self assessment tax return. If it is transferred to a security deposit, then the aforementioned rules would then apply. If however, the amount is kept by the landlord due to the tenant changing their mind or for some other reason, then this income should be reported on your self assessment tax return.

However, in a similar fashion to security deposits, the corresponding costs should also be included on your tax return. Therefore, if the landlord kept the holding deposit to cover their costs, then of course, these costs may be claimed too. As an example, let's say the landlord received a £250 holding deposit from a prospective tenant. Everything was going smoothly, but then the tenant lost his job and would not be able to afford the rent payments. The landlord retained the deposit to mitigate the costs incurred. Costs incurred were £300 for advertising the property and £50 for other revenue professional fees. Again, the tax point would be the point the landlord retained the deposit. So again, if this occurred on 19th December 2013, the £250 holding deposit would be reported as income on the landlord's 13/14 self assessment tax return, along with the total costs of £350.

HMRC guidance on this area is PIM1051.

Q6: My accountant made an adjustment on my tax return with regards child benefit payments I received. What is the position here?

You are referring to the Higher Income Child Benefit Charge. As you may already be aware, to the horror of many hard working parents, HMRC announced a fundamental change to Child Benefit payments, and how they are taxed.

Currently, you can receive £20.30 per week for your oldest eligible child, and £13.40 for additional eligible children. With an effective date of 7 January 2013, parents are affected by the Higher Income Child Benefit Charge if:

  1. You personally earn an income of more than £50,000 and receive child benefit payments.
  2. You live with a partner/spouse who receives child benefit payments and personally earn an income of more than £50,000.
  3. Just one of you receives the child benefit payments, and you both earn income of more than £50,000.

You can no longer receive child benefit if your taxable income is over £60,000. Between income of £50,000 and £60,000 the amount paid over is effectively clawed back through your self assessment tax return, up to 100% up to and over the £60,000 mark.

There are tax planning opportunities which can help mitigate the Higher Income Child Benefit charge. Note first of all that the relevant income to be considered can be adjusted, in a similar fashion to tax credits, such as by way of certain additional gross pension contributions and gift aid donations. Pension contributions especially would help mitigate the child benefit charge as well as provide a future benefit.

The other consideration is how you currently hold your properties jointly, and whether there is benefit in altering the profit splits by way of various mechanisms, to ensure the Higher Income Child Benefit charge is mitigated. This is a particularly useful planning opportunity in two main cases:

  1. Where one husband earns substantially less PAYE income than the wife, or vice versa.
  2. In multiple property portfolios, where there is a mix of ownership between husband and wife.

To action these strategies, it is essential to seek professional advice. It is often useful too, to review your long term strategy and overall tax position at the same time.

If your joint income is between £100,000 and £120,000, although you may not be able to eliminate the Higher Income Child Benefit charge, the above is an example again of planning opportunities to reduce the charge.

Of course, if properties were transferred into a company, things would be very different, but this is a whole different topic!

This new change has been widely criticised and condemned by both parents and the media, but, it's here now, and it affects the 12/13 tax returns onwards. Accountants should advise how best the Higher Income Benefit Charge can be minimised, tailored to your personal circumstances.

Q7: I am interested in running a Furnished Holiday Let. Please could you tell me about the tax implications?

Furnished Holiday Letting rules were first introduced in the Finance Act 1984 and have been subject to many changes over the years, with some of the most significant ones including changes to loss relief rules and the qualification tests. It was nearly abolished by the Labour Party during their tenure, however, with a few tweaks and restrictions, The Coalition have ensured the FHL rules live on! HMRC has various guidance regarding this area in PIM4100.

There are many tax benefits from operating a Furnished Holiday Let, especially compared to standard BTLs. This is mainly due to FHLs being treated as a trade. But, care is required to ensure your outcome is as expected.

How does your property qualify as a holiday let?

The most important starting point is to ensure that your property qualifies in being classed as a furnished holiday let.

How is this ascertained? We look at the 5 important issues below:

  1. First, you must ensure you satisfy all three of the following conditions if a letting is to qualify during the year:

    1. The availability condition: the accommodation needs to be available for commercial letting as a holiday let for at least 210 days.
    2. The letting condition: the accommodation is actually commercially let as holiday accommodation for at least 105 days
    3. The pattern of occupation: the accommodation must not be let for periods of "longer-term occupation" for more than 155 days during the year. Longer term accommodation is a period of more than 31 days. The only time longer term accommodation may be allowed towards the "letting condition" is for an unusual or exceptional circumstance, such as the tenant falling ill or similar.

    Please note, the above is based on the new rules which are effective from 6 April 2012.

    If it is the first period of being let, the first 12 months is the consideration period, and likewise, at cessation of trade, the last 12 months is the consideration period.

  2. The property must be commercially let in the United Kingdom or the European Economic Area, which includes the countries in the EU along with Norway, Iceland and Liechtenstein.
  3. Of course, the property must be furnished, to ensure the tenant enjoys what the HMRC calls "normal occupation."
  4. Pay heed to HMRC's use of the word "commercial," in that although there does not have to be a formal lease, you cannot class free/nominal charged use of the property by friends and family as commercial! Therefore, you need to have a view to be making a profit.
  5. It is important to note that if your property qualifies as Furnished Holiday Let, you must follow the correct rules, as you cannot elect for the property to be taxed like a normal BTL.

Tax Advantages of a Furnished Holiday Let

There are a number of tax advantages you may qualify for in operating a Furnished Holiday Let including:

Rollover relief:

This relief allows you to defer payment of Capital Gains Tax on disposal, assuming the proceeds are reinvested into another qualifying business. It must be noted though, that if the property failed qualification in a period, the rolled over gain would be restricted.

Entrepreneur's relief:

This relief is of great benefit; assuming the property sale is classed as a business disposal, you may be eligible for a reduction in CGT, paying a lower rate of just 10%. The disposal must not be just the sale of a business asset, but must constitute whole or part of a business. Note that there may be restrictions if there is "other" use of the property.

Capital Allowances:

There are various purchases in the course of your letting activities, which will qualify for capital allowances, including fixtures and fittings, furniture and integral features. You may also be entitled to the annual investment allowance on certain purchases.

What if you struggle to meet the conditions of Furnished Holiday Let classification?

If you fail to meet the conditions set out above, your property will revert back to standard BTL tax rules.

Caution needs to be exercised if you have claimed capital allowances in the past, as a damaging balancing charge may arise, which is why planning is so imperative.

On the opposite side, there may also be planning opportunities with regards once you revert back to a BTL, any losses in your ex-FHL, may be offset against your other BTL profits.

However, assuming you wish to retain the FHL status, there are a couple of elections which may help.

The first is named the "Period of Grace" election. If you genuinely intended to meet the 3 conditions set out above, but unfortunately did not, you may elect to be treated as a FHL for another year. In the next year, if you still fail but an election has been made, you should still be treated as a FHL. However, from that point on, if you still fail, you will revert back to a standard BTL. Please note, that you must be able to prove your intention to meet the criteria, so it is essential that the FHL was available to let for the minimum designated days. The election can simply be made on your self assessment tax return.

The second is named the "Averaging" election. As the name suggests, if you have more than one FHL, this allows you to average your letting days to help reach the 105 day threshold. Please note, you cannot mix UK properties with EEA properties for this election, and there is a time limit for making a claim, which is one year from 31 January following the end of the tax year.

So you want to hold the Furnished Holiday Let in a company?

If incorporation is suitable for your circumstances, you could transfer the FHL into a company. As stated before, due to FHLs being treated as a trade, there is the potential eligibility of claiming the Gift of Business Assets relief and incorporation relief. However, Stamp Duty Land Tax will still apply, and due care will also be required again for balancing charges.

Other Points of Note:

You must register for VAT should your income exceed the VAT threshold. This is due to FHL letting income being standard rated for VAT purposes.

If in the past it was your principal private residence, you could potentially receive letting relief too!

Summary:

Every taxpayer's circumstances are different, and as with all areas of landlord taxation, planning is key, especially when planning to claim the reliefs noted above.

Q8: How long should I keep my tax records for before destroying?

Strictly, for the tax year ended 5th April 2015, if you are filing a self assessment tax return with rental income, you need to keep your records until 31 January 2017.

You would need to hold on to your records longer if you filed your tax return late, or if HMRC have started an enquiry. And of course, things are different in cases of fraud.

However, we generally advise our clients to keep records for 6 years anyway.

The self employed and companies must keep their records for 6 years.

Q9: How are costs treated for tax if they are incurred on a potential purchase, if the purchase falls through and does not go ahead?

What you are referring to is abortive capital expenditure, and the bad news is that you are unlikely to be able to offset these against your income or capital gains.

Please note however, this is on the assumption you run a property investment business rather than being a property trader.

Q10: I have undeclared rental income going back several years. What should I do?

You should register under HMRC's Let Property Campaign.

HMRC are currently sending out letters to those who have not been declaring rental income.

The information has been sourced from all manner of data, including letting agents and Land Registry.

We feel it is important to draw everyone's attention to the fact it is not "if" they catch up with you, but "when".

And if they come to you, rather than you coming forward, you could be hit with penalties of 100% of the outstanding tax, and more. By coming forward, you will receive what HMRC refer to as "more favourable terms."

Times have changed, and HMRC's powers have increased and their desire to recoup unpaid tax has intensified.

Building on the success of previous campaigns, HMRC plans to recoup up to £500m in annual unpaid tax from the 1.5 million landlords it is aware of not declaring their rental income. Recent publications show that HMRC are aware that 1 in 3 landlords do not declare rental income.

Chief Secretary to the treasury, Danny Alexander, broke the news of this latest campaign at the Liberal Democrats' Autumn conference. He stated "Over the last decade rents have risen twice as fast as wages, stretching family budgets. But some landlords still failed to pay the right tax due on the rents they receive. I'm talking about landlords who own more than one property, and who rent to students, people with holiday lets and those who let houses in multiple occupations. And it adds up to a staggering £500m owing to the taxman. And we want it back. So we're launching a campaign with a simple message for the rogue minority of landlords. Pay up or face the consequences."

HMRC campaigns have already collected over £500m in tax, and expect this campaign to be particularly successful.

We have extensive experience in dealing with HMRC in these cases, and here at RITA, we can reassure you that we will assist in every way we can to ensure the best possible outcome and the most favourable terms. Of course, you may not realise the extensive expenses that can be claimed against rental income, and it is often the case that things are not as bad as you think! And if you have made a loss, it is imperative to declare it, so that you can offset these against future profits.

And of course, once everything is complete, it will be a weight lifted and one less worry to contend with!

The Let Property Campaign notification form DO1 can be found here:

http://search2.hmrc.gov.uk/kb5/hmrc/form...ormId=7408

And the Let Property Campaign disclosure form DO2 can be found here:

http://search2.hmrc.gov.uk/kb5/hmrc/form...ormId=7409

Q11: Can I offset my rental losses against my PAYE income?

No. If you are showing a loss on your self assessment tax return, this should be carried forward on to your next tax return, and can be offset against future rental profits, of the same rental business. HMRC's relevant guidance here is PIM4210.

Q12: I plan to replace the single-glazed windows, with double glazing ones. Is this a capital cost or a revenue cost?

The Capital Vs Revenue area is very complex, and it is very important to ensure the treatment is correct. Due to technological improvements, this would usually be regarded as a revenue expense, and allowable against your rental income. HMRC guidance is available within PIM2020.

Q13: Is there a way my husband and I can split our profits in a different percentage? I am a higher rate taxpayer, and my husband is a basic rate taxpayer.

It is always worth seeking professional advice first, to ensure you are making the correct decision, and to ensure you understand the full process. In any case, Form 17 allows married couples to declare a profit split other than 50/50. The form is available here http://www.hmrc.gov.uk/forms/form17.pdf

Q14: What are the new mortgage interest rules?

From April 2017, a 4 year equal phase-in will commence, and mortgage interest will no longer be deductible when calculating your rental profits.

Instead, a "reducer" will be applied to your tax owed, at the value of 20% multiplied by your mortgage interest paid. However, what is less commonly known is between now and April 2017, you may still claim for mortgage fees too.

Q15: What are the changes to wear and tear allowance?

If you let any of your rental properties out as fully furnished in the 2015/16 tax year, you can claim a 10% wear and tear allowance.

HMRC's definition of fully furnished is: "one which is capable of normal occupation without the tenant having to provide their own beds, chairs, tables, sofas and other furnishings, cooker etc.

"This is calculated as 10% of the net received.

Net rent is the rental income received, less any expenses which would normally be borne by the tenant, such as council tax and utility bills.

Wear and tear generally works out beneficial, as the allowance can be claimed, even when furnishings are not purchased.

Please note, however, HMRC announced the wear and tear allowance is abolished from 6th April 2016 and introduced a new system effective in the 2016/17 tax year onwards.

This system will be that instead of claiming a flat rate allowance, you will be able to claim the cost of replacing the furnishings but not the initial cost.

There are technicalities, and links with "fixtures," whereby, say, if the fridge was integrated within a fitted kitchen.

The fridge would form part of the fabric of the building, and thus replacing it like-for-like would qualify as a repair even though you are claiming wear and tear allowance on top.

Please note that any contract for the supply of goods/services will be made between you and the provider of the goods/services; not with the Residential Landlords Association Limited or any of its associated companies. The RLA has no liability in relation to any contract entered into by you as the RLA only acts as an introducer.
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Martin Co
Six Hills House
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