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Sarah Bradford explains how HMRC’s property rental toolkit can be used to avoid common mistakes in completing the property income section of the self-assessment return.
HMRC publish a range of `toolkits’, which are designed to assist agents and advisers to help their clients to get their tax returns right. The list of available toolkits includes one for property rental income, the latest version of which relates to the 2015/16 tax year. This toolkit, while aimed at agents and advisers, is useful for anyone with income from property. It highlights errors commonly found in the property income pages of the self-assessment tax return, and contains guidance on how to avoid making those errors.
Profits from UK land or property are treated for tax purposes as arising from a property rental business. The profits assessed to tax are those for the tax year – the accounting period is the year to 5 April. The ‘current year basis’ that applies for trading income purposes is not relevant here. Profits are computed in accordance with general accepted accounting practice (although under the ‘Making Tax Digital’ proposals the option to use the cash basis is to be extended to landlords).
Main risk areas
Mistakes happen - but sometimes they can be avoided. The toolkit aims to help landlords avoid making mistakes by highlighting the risk areas and common mistakes so that corrective action can be taken. Key risk areas identified in the toolkit are as follows:
To ensure that profits are computed correctly, it is vital that good records are kept. The failure to keep proper records is a risk area leading to errors in returns. Poor record keeping may result in:
While HMRC are keen that good records are kept to ensure that taxable items are not overlooked, from the landlord’s perspective good record keeping is essential to ensure that no deductions or reliefs are missed resulting in more tax being paid than is due.
Review record keeping systems to ensure records are correct and complete.
Property income receipts
All income arising from an interest in the land must be taken into account in computing the profits of the property rental business. Consequently, rents from casual or one-off lettings need to be taken into account, as do any cash receipts which are received.
It should be remembered that different rules apply to furnished holiday lettings, and the profits or losses from any furnished holiday lets should be computed separately.
Although (with the exception of furnished holiday lettings) all UK lets by the same person form part of the same property rental business and income and expenses from all properties are essentially thrown in the same pot, care must be taken if the portfolio includes any properties which are let rent-free or let less than market rate, as these should be considered separately so that any expenses can be restricted, as appropriate.
Deductions and expenses
Expenses of the rental business can only be deducted if they have been incurred wholly and exclusively for the purposes of that rental business.
Mistakes are commonly made in claiming a deduction where one is not permitted. This is a particular risk where the expense has a dual purpose, i.e. it is used partly for the purposes of the business and partly for private use. A deduction can only be made where the business part is separately identifiable and satisfies the wholly and exclusively test.
Problems may also arise as a result of a failure to correctly identify revenue and capital items. While a deduction can be made for items that are revenue in nature as long as they meet the wholly and exclusively test, a deduction against profits is not normally permitted for capital items. Relief for capital items is given in the form of capital allowances where the expenditure is qualifying expenditure.
While HMRC’s focus is on ensuring that no deduction is given for items that do not meet the wholly and exclusively test, the landlord should also take care to ensure that allowable expenses have not been overlooked, and that a deduction is given where one is due.
Reliefs and allowances
The property rental toolkit draws attention to the rent-a-room scheme, which allows individuals who let one or more rooms in their own home to receive the income tax-free up to a certain amount. For 2015/16, the rent a room threshold was £4,250. It is increased to £7,500 for 2016/17. The taxpayer can elect for the rent-a-room scheme not to apply. This will be advantageous if the actual position gives rise to a loss, as relief for it would be lost if rent-a-room relief is applied. Where profits exceed the rent-a-room threshold, the taxpayer can choose to be taxed on the excess over the threshold, or they can work out the actual profit or loss and be taxed by reference to that instead.
Where a room is let out in the taxpayer’s home (which can be rented or owned), crunch the numbers to determine whether the rent-a-room scheme gives the best result.
Also under the heading of reliefs and allowances, the toolkit highlights where capital allowances can and cannot be claimed.
For example, capital allowances can be claimed on tools and ladders and cars. However, particularly in relation to cars, where there is private use the need to make an adjustment for that private use should not be overlooked. However, unless the property falls within the definition of a furnished holiday let, capital allowances cannot be claimed for items in a dwelling house. In a property rental business which is not a furnished holiday letting business, capital allowances are not given for furniture, fixtures and fittings for use in a dwelling house. For 2015/16 and earlier years, a 10% wear and tear allowance was available for furnished lettings. From 2016/17, relief is given for the cost of replacing items and the new relief is not restricted to furnished lets.
Capital allowances are available for expenditure on plant and machinery in properties which are not dwelling houses, such as offices, shops, commercial premises, etc.
Review capital expenditure to check whether capital allowances (including the annual investment allowance) can be claimed. For 2015/16, don’t forget to claim the wear and tear allowance for furnished lettings.
Other areas where mistakes are commonly made include the failure to calculate the profits for the tax year in question (e.g. for 2015/16, the year to 5 April 2016). Unlike trading income, property income is not assessed on the current year basis by reference to the accounting period ending in the tax year.
The treatment of losses can also give rise to errors. The rules for relieving losses from a property rental business are restrictive, and losses can only be carried forward and set off against future profits from the same property rental business. However, as the income and expenses for all the properties in the business are generally lumped together when computing the profit or loss for the property rental business, a loss on one property is automatically set against a profit on another to the extent that these occur in the same year.
The property rental toolkit contains a checklist which can be used as an aide memoire to ensure that nothing has been overlooked.
The property income toolkit is a useful resource for landlords and their agents when completing the property pages of the self-assessment return. It also contains details on specific risks within the above headings, and outlines the action that can be taken to mitigate those risks. The toolkit can be found on the Gov.uk website: www.gov.uk/publications/hmrc-property-rental-toolkit.
This is a sample article from the monthly Property Tax Insider magazine. Go here to get your first free issue of Property Tax Insider.