Home » Posts tagged 'Property'
Tag Archives: Property
The Chancellor appears to have it in for landlords at the moment. There is the stamp duty land tax supplement of 3% on purchases of second and subsequent residential properties where completion is on or after 1 April 2016, the restriction in interest rate relief from April 2017 onwards, and the failure to benefit from the cut in capital gains tax from 6 April 2016.
In this harsher climate, it is perhaps worthwhile making sure you have not overlooked any deductible expenses when working out your profit for your property rental business.
Wholly and exclusively
The wholly and exclusively rule applies to determine whether an expense is deductible – if it has been incurred wholly and exclusively for the purposes of the property rental business, it passes this test.
Revenue not capital
A deduction against profits is only available if the expenditure is revenue in nature rather than capital. Broadly, revenue expenses are those incurred in the day-to-day running of the business. By contrast, capital expenditure is that incurred in purchasing or improving an asset, and would include costs of extending or improving the property, a fitted kitchen or expenditure on office equipment or vehicles. However, a deduction is available for replacement furnishings from April 2016.
The following is a list of common expenses that may be deducted when computing profits (as long as the wholly and exclusively test is met):
- interest on loans to buy the property (but not capital repayments);
- letting agents’ fees;
- accountants’ fees;
- legal fees for lets of a year or less or for renewing a lease of 50 years or less;
- utility bills (e.g. gas, electricity);
- buildings and contents insurance;
- cleaning costs;
- maintenance costs (but not improvements);
- costs of a gardener;
- telephone calls;
- stationery and postage;
- staff costs;
- ground rent and service charges; and
- council tax.
This list is not exhaustive.
Replacement of furnishings
From April 2016 a deduction is available for the costs of replacing furniture, furnishings, appliances (including white goods) and kitchenware. The amount of the deduction is the cost of the replacement item (capped at the cost of an equivalent to the item replaced if the replacement is superior to the original) plus any incidental costs of acquiring the new item (such as delivery) or disposing of the old item, less anything received for the old item.
This deduction replaces the 10% wear and tear allowance but, unlike the wear and tear allowance, is not limited to furnished lets.
Need to know: Make sure you have taken out all of your deductible expenses when working out the tax on your property rental income.
Often business premises are owned by the business, this could be for many reasons for example the business has multiple owners or it helps to increase the business net worth.
But in many cases it would be better for the premises to be owned by the business owners pension fund because:
- The object of the business is not to own its own property, the objective should be for the business to make profits from trading
- The business could use cash tied up in the premises to invest in trading activities
- Pensions are a very tax efficient method of ownership – no capital gains, no tax on rental profits
- Company Pension Contributions are Tax Deductible and Individual contributions get income tax refunds
- You may be able to use 3 year Carry Forward to get funds into your pension scheme
In summary to move your business premises from your business to a SIPP or SSAS pension you would do the following:
- Find a lender prepared to lend a third of the property value to your pension scheme (which will be half the value of the fund ie if the property was valued at £300k, your pension could borrow £100k which is 50% of the £200k which will need to be funded by your pension scheme)
- Have the premises independently valued and rent assessed and appoint solicitors
- Create a SSAS or SIPP pension (you can include other people in your SSAS or SIPP investments)
- Transfer into your SSAS or SIPP any funds you have in other pension schemes
- As you are the business owner and its your pension scheme your business could make a payment into your pension scheme, the maximum for the last 3 years would be £140k (£50k + £50k + £40k) see details of NRE
- The pension contribution from your company could be an In Specie payment (meaning its in kind not cash)
- You could make a personal payment to your pension and if you are a higher rate tax payer your will get a tax refund via your self assessment return
- Then your pension scheme buys the premises from your business and rents it back to the business
HMRC launched the ‘Let Property Campaign‘ on the 10th December 2013.
If you’re a landlord who has undisclosed income you must tell HMRC about any unpaid tax now. You will then have 3 months to calculate and pay what you owe.
The Let Property Campaign is an opportunity open to all residential property landlords with undisclosed taxes. This includes:
- those that have multiple properties
- landlords with single rentals
- specialist landlords with student or workforce rentals
- holiday lettings
- anyone renting out a room in their main home for more than £4,250 per year, or £2,125 if the property was let jointly, but has not told HMRC about this income
- those who live abroad or intend to live abroad for more than 6 months and rent out a property in the UK as you may still be liable to UK taxes
According to the Telegraph….
Fewer than 500,000 taxpayers are registered with HMRC as owning properties other than their home. And yet other sources put the number of Britain’s growing army of landlords at between 1.2million and 1.4million.
Why the discrepancy? No one can say for sure, but the taxman has his answer: not enough people are declaring – and paying tax on – their property incomes and gains.
HMRC will identify those who they believe should have made a disclosure by:
- comparing the information already in their possession with customers’ UK tax histories
- continuing to use their powers to obtain further detailed information about payments made to and from landlords
Where additional taxes are due HMRC will usually charge higher penalties than those available under the Let Property Campaign. The penalties could be up to 100% of the unpaid liabilities, or up to 200% for offshore related income.
If you owe tax, you must tell HMRC of your intention to make a disclosure. You need to do this as soon as you become aware that you owe tax on your letting income.
At this stage, you only need to tell HMRC that you will be making a disclosure.
You do not need to provide any details of the undisclosed income or the tax you believe you owe.
House prices are rising as confirmed by the Land Registry in their report 29 April 2013, the annual change is 0.9%, rent is increasing again after a drop in 2009 according to the English Housing Survey, in 2011 it went up 3% to a mean rent after housing benefit of £132 per week. So let’s see who the tenants are (English Housing Survey 2011):
|social and private renting households receiving Housing Benefit|
|age of household reference person|
|16 to 24||6.3||11.9||7.8|
|25 to 34||12.6||26.9||16.5|
|35 to 44||18.1||24.0||19.7|
|45 to 54||16.3||15.8||16.2|
|55 to 64||14.1||9.0||12.7|
|65 to 74||15.8||7.8||13.6|
|75 and over||16.7||4.4||13.4|
|marital status of household reference person|
|six or more||3.0||3.4||3.1|
|couple, no dependent child(ren)||11.5||8.0||10.5|
|couple with dependent child(ren)||10.1||19.2||12.5|
|lone parent with dependent child(ren)||20.9||35.1||24.7|
|other multi-person household||7.1||6.0||6.8|
|length of residence|
|less than 1 year||8.4||27.7||13.6|
|1 year, under 3 years||15.4||32.5||20.0|
|3 years, under 5 years||13.2||15.5||13.8|
|5 years, under 10 years||20.7||12.3||18.4|
|10 years, under 20 years||22.2||8.0||18.4|
|20 years or more||20.1||*||15.7|
|economic activity of|
|household reference person|
|full time work||2.7||13.1||5.5|
|part time work||9.5||18.1||11.9|
|full time education||*||*||1.5|
|£ per week|
|mean gross weekly income|
|of household reference person||206||237||215|
Yields are looking good, its possible to achieve 8% to 10%, take a look at the examples on http://investors.assetz.co.uk/property-listing.htm
Lending rates are low with Bank of England base rate stuck at 0.5%.
So we should see Buy to Let coming back into fashion with investors, with that in mind here are my top tips to minimise your tax:
1. Claim allowable expenses
- Mortgage or Loan Interest (but not capital)
- Repairs and maintenance (but not improvements)
- Travel costs to and from your properties for lettings or meetings
- Advertising costs
- Agents fees
- Buildings and contents insurance
- Ground Rent
- Accountants Fees
- Rent insurance (if you claim the income will need to be declared)
- Legal fees relating to eviction
2. If the property is furnished claim for Wear & Tear, you can claim 10% of the rent each year
3. Claim for repair and advertising expenses incurred in getting the property ready for renting
4. Consider how the property is owned for example your partner may pay less tax or if you own it 50/50 you could use their capital gains tax exemption on sale of the property
5. Consider whether owning the property within a limited company might be better, Corporation Tax is 20% for small companies in the UK which can make dividends more tax efficient than personal income.
6. Make sure any borrowings you have are on the Buy to Let so that you can claim tax relief on the interest
7. Claim the Energy Saving allowance for energy saving work and save £1,500