If you have a holiday let but are worried you won’t meet the occupancy test this year, all is not lost. There are two routes by which it may be possible to reach the required occupancy threshold – an averaging election or a period of grace election.

Furnished holiday lettings – What can you do if you fail to meet the occupancy tests due to the Covid-19 pandemic?

Lets that qualify as furnished holiday lettings (FHL) enjoy special tax rules compared to other types of let, allowing landlords to benefit from certain capital gains tax reliefs for traders and to claim plant and machinery capital allowances for items such as furniture, fixtures and equipment. Profits from an FHL business also count as earnings for pension purposes.

To qualify as an FHL the property must be in the UK or (for the time being at least) in the EEA. It must also be let furnished and meet various occupancy conditions.

Occupancy conditions

To qualify as an FHL, all three occupancy conditions must be met. Where the let is continuing, the tests are applied on a tax-year basis; for a new let, the must be met for the first 12 months of letting.

Test 1 – Pattern of occupancy condition

This test is met if the total of all lettings that exceed 31 days is not more than 155 days in the year.

Test 2 – The availability condition

The property must be available for letting as furnished holiday accommodation for at least 210 days in the tax year (excluding any days in which the landlord stays in the property).

Test 3 – The letting condition

The property must be let commercially as furnished holiday accommodation to the public for at least 105 days in the year. Lets of more than 31 days are not counted unless the let exceeds 31 days as a result of unforeseen circumstances. Lets to family or friends on a non-commercial basis are also ignored.

Impact of Coronavirus

The hospitality and leisure sectors have been hard hit by the Covid-19 pandemic and the lockdown means that many landlords with holiday lets will fail to meet the letting condition in 2020/21. However, all is not lost and there are two routes by which it may be possible to reach the required occupancy threshold – an averaging election or a period of grace election.

Averaging election

An averaging election can be used where a landlord has more than one holiday let and one or more of the properties does not meet the letting condition. Instead of applying this test on a property by property basis, it can be applied by reference to the average rate of occupancy across all properties let as FHLs. Thus, the test is treated as met if on average the holiday lets are let for 105 days in the tax year.

While, at the time of writing, it was unclear when all the restrictions may be lifted, an averaging election may help landlords with mixed portfolios including some winter holidays lets as well as those that are popular in the summer.

Period of grace election

A period of grace election can be used where the landlord genuinely intended to meet the letting condition but was unable to. The Coronavirus pandemic is a prime example of where this may be the case.

To make a period of grace election, the pattern of occupation and availability conditions must be met. Also, the letting condition must have been met in the year before the first year in which the landlord wishes to make a period of grace election. If the letting condition is not met again in the following year, a second period of grace election can be made. However, if the test is not met in year 4 after two period of grace elections, the property will no longer qualify as a furnished holiday letting.

The election provides a potential lifeline to landlords of holiday lets unable to meet the letting condition in 2020/21 as a result of the Covid-19 pandemic. It can be made either on the self-assessment tax return or separately (either with or without an averaging election). A period of grace election for 2020/21 must be made by 31 January 2023.

Partner note: Self-assessment Helpsheet HS253.

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For landlords, the impact that unpaid or late paid rent has on the calculation of taxable profits depends on whether you prepare accounts on the cash basis or under the accruals basis. We go through some case studies in today’s blog

Late or unpaid rent – Impact on the calculation of a landlord’s taxable profits

As with other sectors, landlords may be adversely affected by the Covid-19 pandemic. Tenants suffering cashflow difficulties may be unable to pay their rent in full or on time. The impact that unpaid or late paid rent has on the calculation of taxable profits depends on whether the landlord prepares accounts on the cash basis or under the accruals basis.

Cash basis

The cash basis is the default basis of preparation for most landlords whose cash receipts for the tax year are £150,000 or less. Under the cash basis income is recognised when the money is received not when it is earned, and expenses are accounted for when the money is paid not when the expenses is incurred. Receipts are income of the period in which the money is received, and expenses are outgoings of the period in which they are paid. Consequently, there are no debtors or creditors.

This provides automatic relief where rent is not paid or is paid late, protecting the landlord from having to pay tax on money he or she has yet to receive.

Example 1

Harry is a landlord and lets a flat for £800 a month, payable on 25th of each month. Due to the Covid-19 pandemic, his tenant does not pay the rent that was due on 25 March 2020. The tenant eventually pays £200 of the overdue rent in June 2020 and the remaining £600 in September 2020.

Harry prepares the accounts for his rental property business on the cash basis, accounting for rental income only when the rent has been received. The rent due for March 2020 (falling in the 2019/20 tax year) is not received until June and September 2020 – which fall in the 2020/21 tax year. As a result, the rent for March is taken into account in computing Harry’s taxable profits for 2020/21 rather than 2019/20.

Accruals basis

Rental profit must be determined under the accruals basis in accordance with UK GAAP where the landlord is not eligible for the cash basis (for example, because rental receipts for the tax year are more than £150,000) or because the landlord elects for the cash basis not to apply. Under the accruals basis, rental income is taken into account in the period to which it relates, rather than when the rent is paid. Likewise, expenses are deducted when the expense is incurred not when the bill is paid, if different. There is no automatic relief if rent is not paid on time as under the cash basis.

Example 2

Louisa has a number of rental properties and as her rental receipts exceed £150,000 a year, she prepares the accounts of her rental business under the accruals basis. One of her tenants fails to pay the rent of £2,000 for March 2020 which was due on 1 March 2020. The tenant eventually pays the late rent in September 2020.

As accounts are prepared under the accruals basis, the rent due for March 2020 is taken into account in working out the taxable profit for 2019/20, regardless of the fact that it was paid in 2020/21 rather than in 2019/20.

There is, however, relief available where the rent remains unpaid and is not recovered, as opposed to being paid late – a deduction is permitted for a debt which is genuinely bad or doubtful.

Partner note: ITTOIA 2005, ss. 271A to 271D.

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Not putting a property in joint names prior to selling is an easily avoided mistake – read our blog to see if this would benefit you.

Potential benefits of putting a property into joint names prior to sale

Where a property qualifies in full for private residence relief, it is perhaps academic, from a tax perspective at least, whether a couple own it jointly or it is the one name only. In either case, the relief shelters any gain that arises and there is no tax to pay.

However, where a gain is not fully sheltered by private residence relief, as may be the case for an investment property or a second home, there can be very different tax consequences depending on how it is owned.

Take advantage of the no gain/no loss rules for spouses and civil partners

There are some breaks in the tax system for married couples and civil partners, and one of them is the ability to transfer assets between each other at a value that gives rise to neither a gain nor a loss. This can be very useful from a tax planning perspective to secure the optimal capital gains tax position on the sale of property where full private residence relief is not available. This enables a couple to utilise available annual exempt amounts and lower tax bands.

Capital gains tax on residential property gains is charged at 18% where total income and gains do not exceed the basic rate limit (set at £37,500 for 2019/20) and 28% thereafter.

Case study

Ron and Rita have been married a number of years and in addition to their main residence, they have a holiday cottage, which is owned solely by Ron. As their lives are busy, they no longer use the cottage much and decide to sell it. They expect to realise a gain of £100,000.

Rita does not work and has no income of her own. Ron is a higher rate taxpayer. Neither has used their annual exempt amount for 2019/20 (set at £12,000).

If they leave the property in Ron’s sole name, they will realise a chargeable gain of £88,000 after deducting his annual exempt amount of £12,000. As a higher rate taxpayer, this will give rise to a capital gains tax bill of £24,640 (£88,000 @ 28%).

However, as Rita has her basic rate band and annual exempt amount available, making use of the no gain/no loss rule to put the property in joint names prior to sale can save the couple a lot of tax. Each will realise a gain of £50,000.

As far as Ron is concerned, £12,000 of his gain will be sheltered by his annual exempt amount, leaving a chargeable gain of £38,000 on which tax of £10,640 will be payable.

Rita will also have a gain of £50,000, of which the first £12,000 is covered by her annual exempt amount, leaving a chargeable gain of £38,000. As her basic rate band is available in full, the first £37,500 is taxed at 18% (£6,750), with the remaining £500 being taxed at 28% (£140). Thus, Rita’s tax liability is £6,890, and the couple’s total tax bill is £17,530.

By taking advantage of the no gain/no loss rule to put the property into joint names prior to sale, the couple will be able to make use of Rita’s annual exempt amount and basic rate band, reducing the capital gains tax payable on the sale from £24,640 to £17,530 – a saving of £7,110.

Partner note: TCGA 1992, s. 58.

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It is easy to fall into the trap of assuming that legal and professional costs can be computed in calculating taxable profits if they are incurred wholly and exclusively for the purposes of the business; however this is only part of the story.  

Legal and professional fees – Capital or revenue?

At some point, a landlord is likely to incur legal and professional fees in connection with the running of their property rental business. It is easy to fall into the trap of assuming that these costs can be computed in calculating taxable profits if they are incurred wholly and exclusively for the purposes of the business; however this is only part of the story. The landlord must also determine whether the costs are revenue or capital in nature. The rules also differ depending upon whether the accounts are prepared on the cash basis or using traditional accounting under the accruals basis.

The rule

The nature of the legal fees follow that of the matter to which they relate – so if the fees are incurred in relation to an item which is itself revenue in nature, the legal and professional fees are also revenue in nature. Likewise, legal fees that are incurred in connection with a matter that is capital in nature are also capital in nature.
Legal fees that are revenue in nature would include, for example, fees incurred to recover unpaid rent, while legal fees that are capital in nature would include fees incurred in connection with the purchase of a property.

Cash or accruals basis

Revenue items are deductible in computing profits regardless of whether they are prepared under the cash or accruals basis, although the time at which the relief is given will differ. Under the cash basis, the deduction is given for the period to which the expenditure relates, for the cash basis the deduction is given for the period for which the expenditure is incurred.
For capital expenditure different rules apply. No deduction is allowed for capital expenditure under the accrual basis, whereas under the cash basis, the treatment depends on the nature of the item – capital expenditure is deductible under the cash basis unless the expenditure is of a type for which a deduction is expressly forbidden. Items of the forbidden list include expenditure in or in connection with lease premiums and the provision, alteration or disposal of land (which includes property).

Example of allowable revenue items

A deduction for legal and professional fees will normally be allowed where they relate to:
• costs of obtaining a valuation
• normal accountancy costs incurred in preparing accounts of the rental business and agreeing the tax liabilities
• costs of arbitration to determine the rent
• the costs of evicting an unsatisfactory tenant to re-let the property

Example of capital expenses

The following are examples of legal and professional fees which are capital in nature:
• legal costs incurred in acquiring or adding to a property
• costs in connection with negotiations under the Town and Country Planning Act
• fees incurred in pursuing debts of a capital nature, such as the proceeds due on sale

Leases

Leases can be tricky. The expenses incurred in connection with the first letting or subletting for more than one year are deemed to be capital and therefore not deductible – this would include the legal fees incurred in drawing up the lease, surveyors’ fees and commission. However, if the lease is for less than one year, the associated expenses can be deducted. Normal legal and professional fees on the renewal of a lease are also deductible if the lease is for less than 50 years; although any proportion of the fees that relate to the payment of a premium are not deductible.
If a new lease closely follows the previous lease, a change of tenant will not render the associated fees non-deductible. However, if the property is put to other use between lets, or a long lease, say, replaces a short lease, the associated costs will be capital and non-deductible.

Partner note: HMRC’s Property Income Manual PIM 2120

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Renting out a property at a rate below the commercial level might sound like a great idea – but it might cost you dearly if you try to seek tax relief for your expenses!

Properties not let at a commercial rent

There may be a number of reasons why a property is occupied rent-free or let out at rent that is less than the commercial rate. This may often occur where the property is occupied by a family member in order to provide that person with a cheap home. For example, a parent may purchase a house in the town where their student son attends university and let it to the student, and maybe even his housemates, at a low rent to help them out. While the parents’ motives are doubtless philanthropic, their generosity may cost them dearly when it comes to obtaining relief for the associated expenses.

Wholly and exclusively rule

Expenses can only be deducted in computing taxable rental profits if they are incurred wholly and exclusively for the purposes of the property rental business. Unfortunately, HMRC take the view that unless the property is let at full market rent and the lease imposes normal conditions, it is unlikely that the expenses are incurred wholly and exclusively for business purposes. So, where the property is occupied rent-free, there is no tax-relief for expenses.

If the property is let at a rent that is below the market rent, a deduction is permitted, but this is capped at the level of the rent received from the let. This means that where a property is let at below market rent, it is not possible for a rental loss to arise, or for expenses in excess of the rent to be offset against the rent received from other properties in the same property rental business.
Periods between lets

Where there are brief periods where the property is occupied rent-free or let out cheaply, it may be possible to obtain full relief for expenses. For example, if the landlord is actively seeking a tenant and a relative house sits while it is empty, relief will not be restricted as long as the property remains genuinely available for letting. In their guidance HMRC state, that ‘ordinary house sitting by a relative for, say, a month in a period of three years or more will not normally lead to loss of relief’. However, if a relative takes a month’s holiday in a country cottage, relief for expenses incurred in that period will be lost.

Commercial and uncommercial lets

Where a property is let commercially some of the time and uncommercially at other times, expenses should be apportioned on a just and reasonable basis between the commercial and non-commercial lets. Any excess of expenses over rents in the period when commercially let can be deducted in the computing the profit for the rental business as a whole. However, an excess of expenses over rent when the property is let uncommercially are not eligible for relief.
Timing must also be considered – expenses relating to uncommercial lets cannot be deducted simply because they are incurred when the property is let commercially.

Partner note: HMRC Property Income Manual PIM 2130.

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This blog explains what qualifies for relief for finance costs, the limit on eligible borrowings, and how capital repayments work with a quick example.

Allowable finance costs

Although the way in which landlords obtain relief for finance costs on residential properties is changing, there is no change to the type finance costs that are eligible for relief.

What qualifies for relief

The basic rule is that relief is available for expenses that are incurred wholly or exclusively for the purposes of the property rental business, and this rule applies equally to finance costs. Relief is available for eligible finance costs where they meet this test.

The definition of finance costs includes mortgage interest and interest on loans to buy furnishing and suchlike. Relief is also available for the incidental costs of obtaining finance, as long as the interest on the loan is allowable. Incidental costs of loan finance include items such as arrangement fees, and fees incurred when taking out or repaying loans or mortgages.

Limit on eligible borrowings

A landlord can obtain relief for the costs of borrowings on a loan or mortgage up to the value of the property when it was first let. Buy-to-let mortgages are often more expensive than residential mortgages with interest charged at a higher rate. The loan does not have to be secured on the let property. Where a landlord wishes to buy a rental property and has sufficient equity in their own home, it may make commercial sense to release capital from the home by borrowing against it and using the money to purchase the rental property. Interest on the loan is eligible for relief, despite the fact the loan is not secured on the rental property.

No relief for capital repayments

Capital repayments, such as the capital element of a repayment mortgage or loan repayments, are not eligible for relief. Where the borrowings are in the form of a repayment mortgage, it will be necessary to split the payment between the interest and capital when working out the relief. The lender should provide this information on the statement.

Example

Mervyn wishes to invest in a buy to let property. As he only has a small mortgage on his home, he remortgages to release £150,000 of equity.
Following the remortgage, he has a mortgage of £200,000 on his own home. Using the released equity, he buys a property to let for £150,000. He spends some time renovating the property in his spare time before letting it out. When the property is first let, it has a value of £160,000.

During the 2019/20 tax year, Mervyn pays mortgage interest of 10,000and makes capital repayments of £10,800. The property is let throughout.
Mervyn can claim relief for 80% of the interest costs – this is attributable to the borrowings of £160,000 (80% of the loan of £200,000), being the value of the let property when first let. The interest eligible for relief is therefore £8,000 (80% of £10,000). For 2019/20, 25% (£2,000) is relieved by deduction with the balance giving rise to a deduction from the tax due of £1,200 (75% x £8,000 x 20%).

No relief is available for the capital repayments.

Partner note: ITTOIA 2005, ss. 272A, 272B, 274A, 274B

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HMRC have given new guidance on how stamp duty is applied to residential property which has land. Take a look at our short blog if you’re thinking of purchasing a property that has features such as farmland, stables or orchards.

Grounds and gardens for SDLT

Stamp duty land tax (SDLT) on residential property also applies to land that form the garden or grounds of the property. To ensure that the right rate of SDLT is applied, it is therefore important to ascertain whether any land purchased with a property constitutes its garden or grounds. The rules here are not the same as those applying for capital gains tax private residence relief.

HMRC have recently updated their guidance in this area.

Status of the building

The first step in determining whether land is residential land is to determine the status of the associated building. If the building is a residential property for SDLT purposes, all land forming part of the ‘garden or grounds’ is residential property. Consequently, if at the time of purchase the property is not capable of being used as a dwelling, or is in the process of being constructed or adapted for residential use, the building is not residential property for SDLT purposes and any associated land is also not residential property.

Status of the land

Land that constitutes the ‘garden or grounds’ of a building which counts as residential property for SDLT purposes will also be residential property, and therefore subject to SDLT residential property rates, even if it is sold separately from the building.

The key date is the date of the transaction. However, past use of the land is taken into account by HMRC is order to establish the relationship between the land and the building. Future or planned future use is not relevant, although where use changes over time, the status of the land may also change.

No single factor

In deciding whether land counts as ‘garden or grounds’ a range of factors will come into play – there is no single determining factor. However, not all factors will carry equal weight. It is necessary to consider how the land is used.

Questions to ask include:

  • Is there evidence that the land has been actively and substantially exploited on a commercial basis?
  • If the activity could be for leisure or commercial purposes, such as beekeeping or equestrian use, is there evidence of commercial use?
  • Has a lease been granted to a third party for exclusive use of the land? This would suggest that the land is unlikely to be ‘garden or grounds’.
  • Is the land of a type which would be expected to be ‘garden or grounds’ unless commercial use is established, such as land used as a paddock or orchard?
  • Is the land agricultural land which is sitting fallow? Such land is unlikely to be regarded as ‘garden or grounds’.

Outbuildings

The nature and layout of any outbuildings can be significant in determining whether land is ‘garden or grounds’. The presence of domestic outbuildings, areas laid out for hobbies, small orchards or stables and paddocks suitable for leisure use would indicate that the land is ‘garden or grounds’. However, the presence of commercial farming, commercial woodland, commercial equestrian use or other commercial use would suggest the contrary.

Size and proximity to dwelling

Physical proximity to the dwelling makes it more likely that the land is ‘garden or grounds’. However, land separated from the building may also fall into this category.

The size of the land in relation to the size of the building will also be relevant – a small cottage is unlikely to have a garden and grounds of many acres but a stately home may do.

The overall picture

In deciding the character of the land for SDLT purposes, it is necessary to look at the overall picture that emerges at the transaction date.

Partner note: FA 2003, s. 116(1)(a); HMRC’s Stamp Duty Land Tax Manual SDLTM00440ff.

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Joint tenants v tenants in common – Which you choose will depend on whether you’d like flexibility in allocating property income, and how you want your property to be passed on.

Joint tenants v tenants in common – Does it matter?

There are two different ways of owning property jointly – as joint tenants or as tenants in common. The way in which the property is owned determines exactly who owns what and also what happens when one of the joint owners dies and how any income is taxed.

Joint tenants

Where two or more owners own a property as joint tenants, they jointly own the whole property rather than owning individual shares. Each owner has equal rights to the whole property. When one of the joint owners dies, the remaining joint owners own the whole property. The deceased is not able to pass his or her share on to someone else.

Example

Helen and Harry are married and own their family home as joint tenants. The couple have three children. If, for example, Harry dies first, his share of the property automatically passes to Helen. Harry cannot leave his share of the property to his children.

Where a property that is owned as joint tenants is rented out, the income is treated as arising in equal shares as all owners have an equal stake in the property. For spouses and civil partners this is the default position; however, there is no possibility of making a Form 17 election (see below) as the property owned as joint tenants can only be owned equally.

Tenants in common

Tenants in common own individual shares in the property and have more flexibility than joint tenants as to what they do with their stake in the property. On death, their stake does not automatically go to the other joint owners; rather it will follow the provisions of the will (or, if there is no will, the intestacy provisions).

It will be beneficial to own property as tenants in common if you want to leave your share of the property to someone other than the other joint owner.

Example

Jack and Jane are married. Each have children from previous relationships. They own a holiday cottage as tenants in common. In their wills, they have each made provision for their share to pass to their own children.

Where the property is let out, owing the property as tenants in common provides more flexibility as to how the income is allocated for tax purposes. Where the joint owners are spouses or civil partners, the income is treated as arising equally. However, where the actual beneficial ownership is unequal, they can elect (on Form 17) for the income to be taxed in accordance to their ownership shares where this is beneficial. If the tenants in common are not married or in a civil partnership, the income is taxed by reference to their actual stake in the property.

Changing ownership status

It is relatively easy to change the type of ownership, for example, if the property is owned as joint tenants it may be desirable to own it as tenants in common to enable each owner to leave their share to someone else. A property can also be changed from sole ownership to joint ownership – ether as tenants in common or joint tenants.

Partner note: Law of Property Act 1925, ss. 34, 36;. ITA 2007 ss. 836. 837.

 

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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.

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A quick guide to what should be included when calculating the profit or loss for a property rental business.

Property income receipts – what should be included?

When calculating the profit or loss for a property rental business, it is important that nothing is overlooked. The receipts which need to be taken into account may include more than simply the rent received from letting out the property.

Rent and other receipts

Income from a property rental business includes all gross rents received before any deductions, for example, for property management fees or for letting agents’ fees. Other receipts, such as ground rents, should be taken into account.

Deposits

The treatment of deposits can be complex. A deposit may be taken to cover the cost of any damage incurred by the tenant. Where a property is let on an assured shorthold tenancy, the tenants’ deposit must be placed in a tenancy deposit scheme.

Deposits not returned at the end of the tenancy or amounts claimed against bonds should normally be included as income. However, any balance of a deposit that is not used to cover services or repairs and is returned to the tenant should be excluded from income.

Jointly-owned property

Where a property is owned by two or more people, it is important that the profit or loss is allocated between the joint owners correctly. Where the joint owners are married or in a civil partnership, profits and losses will be allocated equally, even if the property is owned in unequal shares, unless a form 17 election has been made for profits and losses to be allocated in accordance with actual ownerships shares where these are unequal.

Where the joint owners are not spouses or civil partners, profits and losses are normally divided in accordance with actual ownership shares, unless a different split has been agreed.

Overseas rental properties

Where a person has both UK and overseas rental properties, it is important that they are dealt with separately. The person will have two property rental business – one for UK properties and one for overseas properties. Losses arising on an overseas let cannot be offset against profits of a UK let and vice versa. Proper records should be kept so that the income and expenses can be allocated to the correct property rental business.

Furnished holiday lettings

Different tax rules apply to the commercial letting of furnished holiday lettings and where a let qualifies as a furnished holiday let it must be kept separate from UK lets that are not furnished holiday lettings. Likewise, furnished lets in the EEA must be dealt with separately from UK furnished holiday lets.

Getting it right

Good record keeping is essential to ensure that not only that all sources of income are taken into account, but also that any income received is allocated to the correct property rental business.

Partner note: HMRC’s property rental toolkit (see www.gov.uk/government/publications/hmrc-property-rental-toolkit).

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