Here are some of the more frequent questions which Accountants 4 Landlords often get asked.
Do I need to register my rental property with the authorities?
If renting out a property in the UK you will need to register this with HM Revenue & Customs as soon as possible and complete a Self-Assessment tax return each year. If already completing a Tax Return for other reasons, you will need to complete land and property pages each year and add these to the form that is submitted. All income received and expenses incurred in the period 6th April to the following 5th April will need to be declared and the return will need to be submitted to the authorities by the following 31st January in order to avoid penalties and fines.
I own this property jointly with someone else. Who needs to register/sign any paperwork?
If a property is owned jointly, even between spouses, all parties should register their interest with the authorities and will need to declare to HM Revenue & Customs each year their share of any profits/losses made. If owned by spouses, HM Revenue & Customs will treat the property as owned in equal shares between the parties unless you can justify and prove that it should be in a different proportion. Any paperwork for HM Revenue & Customs or for the letting agent will need to be signed by all parties.
What tax will be due on my rental profits?
A tax return must be completed each year to show all income received and expenses incurred in relation to your rental property. If a profit is made overall, you will be liable to UK tax on that profit. This applies whether you are currently resident in the UK or not. The rate of tax due on your profit will depend upon your other income received in the year and could be either 20% if you are a basic rate tax payer, 40% if a higher rate tax payer or 45% if subject to the highest rate of tax. If a loss is made overall on the property rental, this loss can be carried forward and will be offset against the first available profits made in future years.
Can I claim for the legal costs incurred on the original purchase of the property?
Unless the property was inherited, when you purchased the property you will probably have incurred various costs including solicitors fees, stamp duty land tax, estate agent fees etc, all of which were detailed on your completion statement. These can not be used to reduce your tax bill by offset against the rental income received on an annual basis, however you can claim them as deductions when the property is eventually sold. You should therefore keep all original purchase details in a safe place so that you have evidence of costs incurred, as any sale may not take place until many years down the line.
Will I have to pay tax when the property is sold?
Any profit made upon sale of your rental property in future will be subject to Capital Gains tax in the UK, unless you are an overseas landlord who is not ordinarily within the UK. If you are overseas for a temporary period of time (less than six years) you may be subject to capital gains tax in the year that you return to the UK. You will need to retain a note of the original acquisition date, costs and any related solicitors fees (the completion statement is usually sufficient) as these will be required for any disposal calculations. If you have ever lived in the property as your main or only residence, this could also reduce the capital gains tax due.
How long do I need to retain any records for?
All records related to the rental property income, expenses, mortgages and bank statements should be retained for 6 years from the end of the tax year in which the income is declared.
For example records related to rentals declared in the following tax years ends should be held onto until the following dates:
|Tax year ended:-||Hold records until:-|
|5th April 2010||31st January 2016|
|5th April 2011||31st January 2017|
|5th April 2012||31st January 2018|
|5th April 2013||31st January 2019|
|5th April 2014||31st January 2020|
I live outside of the UK - does this make a difference?
If you are not residing in the UK, your letting agent will be required to withhold tax deductions at a rate of 20% from any rent collected for you, as part of HM Revenue & Customs Non Resident Landlord Scheme. This tax deduction will be paid across to HM Revenue & Customs on your behalf and you should complete a UK tax return each year so that if the deductions made exceed the total liability due, you can claim a refund of any excess. Alternatively, you can apply to HM Revenue & Customs for payments to be made to you without any deduction at source. They will review your record and, if they are happy that you will submit accurate forms each year they will instruct your letting agent accordingly. UK Self-Assessment tax returns must continue to be completed each year on time and any liabilities paid on time, otherwise HM Revenue & Customs may withdraw their agreement and instruct the management agent to withhold tax at source once more. Your overseas status could also affect the amount of capital gains tax that is due upon sale and this will depend on your specific circumstances.
I am from the USA, do I need to pay UK tax?
If a rental property is held in the UK, the UK tax authorities will expect you to pay UK tax on any profits made. This applies even if you are from the USA. You are likely to need to declare the rental on your US tax returns and should be able to offset any UK tax incurred against any US liability under the double tax treaties.
I am thinking about paying off part of my mortgage. Does this affect my tax position?
If you no longer have a mortgage against the rental property, you will no longer have any interest charges you can claim as an expense against the income received. This will increase your tax bill. You do not however have to hold a mortgage against the property and if you wish to pay it off, you can do so. No notification need be made to the authorities.
Is it best to decorate/perform maintenance on the property whilst there is a tenant in situ?
Yes. If the tenant remains in occupation, you will still be receiving income each month which can contribute towards any costs incurred and you can start the renovations at the date that suits you. If you prefer to do this when the property is empty, you will need to wait until the contract with the current tenant expires, which could delay your progress. You will also incur costs of re-advertising the property once the renovations are complete and it could remain empty for a number of months, with no income being received but costs continuing to be incurred. The tenant and any letting agent being used should be notified of any potential disruption in advance (2 weeks notice?).
Do I have to use a letting agent?
It is your choice whether to use an agent or not. If you do not use an agent, you will need to be available to respond to tenant queries and any problems that may arise at any time. You will also need to be aware of your responsibilities as a landlord, legal and otherwise as you will not be receiving the advice from an expert. Also, if you live outside of the UK and HM Revenue & Customs require 20% tax to be withheld from payments made to you, they may rely on the tenant to withhold tax and pay it to HM Revenue & Customs on your behalf, which is harder to regulate and not ideal.
Do I have to appoint a UK tax advisor?
If you are happy to prepare rental accounts and any personal tax returns required each year, you do not have to appoint a UK tax advisor. The benefits of appointing one do however include the following: - Advice on the latest tax rules and regulations as and when they change - Advice on additional expenses or allowances that you may be entitled to and are not already claiming - Advice on ways to reduce your overall tax liabilities where possible - Better cash flow as you will receive advance notice of any tax liabilities due - Freeing up your time to deal with more important issues, as the advisor will generally deal with the annual paperwork issued by the authorities in relation to your tax affairs, will prepare the rental accounts, will prepare the tax return and provide you with the advice relevant to your personal position.