Failing to take your record keeping obligations seriously as a landlord could mean that you pay more tax than necessary, or worse that you could be on the receiving end of a penalty from HMRC.

Buying a property to let – the importance of keeping records from day one

For tax purposes, good record keeping is essential. Without complete and accurate records, it will not be possible to provide correct details of taxable income or to benefit from allowable deductions. Aside from the risk of paying more tax than is necessary, landlords who fail to take their record keeping obligations seriously may also find that they are on the receiving end of a penalty from HMRC.

Recording expenses

A deduction is available for expenses that are incurred wholly and exclusively for the purposes of the rental business. A deduction is available for qualifying revenue expenses regardless of whether the accounts are prepared on the cash basis or under the traditional accruals basis.

Revenue expenses are varied and are those expenses incurred in the day to day running of the property rental business. They include:

  • office expenses
  • phone calls
  • cost of advertising for tenants
  • fees paid to a managing agent
  • cleaning costs
  • insurance
  • general maintenance and repairs

A record should be kept of all revenue expenses, supported by invoices, receipts and suchlike.

The treatment of capital expenditure depends on whether the cash or the accruals basis is used. For most smaller landlords, the cash basis is now the default basis.

Under the cash basis, capital expenditure can be deducted unless the disallowance is specifically prohibited (as in the case in relation to cars and land and property). Under the accruals basis, a deduction is not given for capital expenditure, although in limited cases capital allowances may be available. Capital expenditure would include improvements to the property and new furniture or equipment which does not replace old items.

Records should identify whether expenditure is capital or revenue and also whether it relates to private expenditure so that it can be excluded.

Records should also be kept of replacement domestic items and the nature of those items. A deduction is available on a like-for-like basis.

Start date

Although the property rental business does not start until the property is first let, records should start as soon as expenditure is incurred in preparation for the letting.

As well as allowing relief for expenses incurred while the property is let, relief is also available for expenses which are related to the property rental business and which are incurred in the seven years prior to the start of the business. Relief is given on the same basis as for expenses incurred after the start of the property rental business; expenses can be deducted as long as they are incurred wholly and exclusively for the purposes of the property rental business. Capital expenditure is treated in accordance with rules applying to the chosen basis of accounts preparation.

Relief is available under the pre-trading rules, as long as:

  • the expenditure is incurred within a period of seven years before the date on which the rental business started
  • the expenditure is not otherwise allowable as a deduction for tax purposes
  • the expenditure would have been allowed as a deduction has it been incurred after the rental business had started

Relief is given by treating the expenses as if they were incurred on the first day of the property rental business.

Expenses incurred in getting a property ready to let can be significant. It is important that accurate records are kept of all expenditure incurred wholly and exclusively for the purposes of the let from the outset so that valuable deductions are not overlooked.

Partner note: ITTOIA 2005, s. 57; CTA 2009, s. 61.

To find out more please follow us on Facebook , Twitter or LinkedIn. Feel free to contact us on 0333 006 4847 or request a call back by texting to 075 6464 7474

Property Business – What SIC code should I use for my property Company ?

A SIC code stands for Standard Industrial Classification code, and classifies your business activity at Companies House. SIC code for a company can be changed at any time and be amended when you file your next  Confirmation Statement. While forming a company to run your property business, you will be asked to provide SIC code which closely describes your business activities. There are various reasons to choose an appropriate SIC code so as to avoid any complexities later on with tax authorities and Lenders.

Practically, there are only four: 68100, 68209, 68320 and 68310, and here’s a brief explanation of their classification.

  1. SIC code 68100 is for the buying and selling of own real estate; so, if you’re going to be flipping and trading, this would be the code for you. So if you intend to buy properties to resell, then this is the appropriate SIC code.

2.    SIC code 68209 is for the letting and operating of own or leased real estate. In other words, for buying and holding property and renting it out.      So if you are buying a property to hold as an investment (single BTLs or HMOs) or if you are using Rent to Rent strategy this will be the SIC code for  your company.

 

  1. SIC code 68320 is for the management of real estate on a fee or contract basis. So, for example if you’re going to set up your own management company, then this would be the right classification for you.

 

  1. SIC code 68310 is for real estate agencies. So, for all the deal sourcers/packagers who act as an agent for investors.

As you can see, these codes effectively tell Companies House what a business is going to be doing from a tax point of view. You can choose up to a maximum of four SIC codes for one company. SIC codes also play a crucial role with lenders/Finance providers – again, these codes let lenders know what activity a property company is going to undertake, and will help lenders assess whether they want to lend to you or not.There are issues however with having multiple property activities running through the same company, and it would be wise to seek professional advice to ensure your company structure is correct and efficient from the outset, with particular consideration to Capital Gain Tax and business property relief.

To find out more please follow us on Facebook , Twitter or LinkedIn. Feel free to contact us on 0333 006 4847 or request a call back by texting to 075 6464 7474

Interest relief for renovation or development costs

Often, when a property is purchased there is work to be done before it can be let out or sold. Where this work is financed by a mortgage or other loan, the way in which and the extent to which relief is available for the interest costs depends whether it falls with the property income or trading income tax rules.

The following case studies illustrate the different approaches.

Case study 1: Buy-to-let investment

Simon buys a property as an investment, with the intention to let it out long term. The property has been neglected and needs doing up before he can put it on the rental market. The property costs £250,000 and Simon has budgeted £40,000 to renovate it. The purchase and refurbishment work are financed with savings of £70,000 and a mortgage of £220,000. Interest on the mortgage is £800 per month.

The purchase completes on 1 May 2018. The renovation work takes six months and the property is let from 1 November 2018. At the time the property is let, it is valued at £280,000.

Under the property income rules interest is allowed as a deduction or tax reduction (as appropriate) to the value of the property when first let. In this case the value of the property when first let (£280,000) is more than the mortgage of £220,000, so relief for the full amount of the interest is allowed in computing the rental profit. For 2018/19, 50% of the interest costs are deductible from the rental income, with relief for the remaining 50% being given as a basic rate tax reduction. For 2019/20, 25% of the interest costs are eligible as a deduction, with relief for the remaining 75% being given as a basic rate tax reduction.

Relief for the interest incurred in the renovation period before the property was first let is available under the pre-commencement provisions. These allow relief to the extent that it would be available had the interest been incurred while the property was let. The interest in the pre-letting period (i.e. that relating to the period from 1 May 2018 to 31 October 2018 of £4,800) is treated as incurred on the day that the property rental business commences, i.e. 1 November 2018.

Case study 2

David also buys a property to do up. However, his intentions are different to Simon in that he wishes to do the property up as quickly as possible and sell at a profit, buying a further property to do up with the proceeds. David is a property developer rather than a landlord and any interest costs incurred in funding the development are deductible under the trading provisions in computing his trading profit. This would be the case regardless of whether David operates as a sole trader or other unincorporated business or forms a company through which to carry out his property development business. Availability of the interest deduction depends on the ‘wholly and exclusively’ rule being satisfied.

To find out more please follow us on Facebook , Twitter or Linkedin. Feel free to contact us on 0333 006 4847 or request a call back by texting to 075 6464 7474