Get Your Property Self-Assessment Right

December 29, 2014 4:13 pm Published by

property self assessment tax notice with reading glassesDid you know that last year the HMRC reported that more than 750,000 people missed the self-assessment deadline? This resulted in millions of pounds worth of penalties across the country; certainly something we all want to avoid.

Rather than fail to submit yours this coming deadline (31st January 2015) we have provided you with a number of useful hints and tips when filling out property self-assessment as a landlord.

So What Is Property Self-Assessment?

As a landlord one of the first things you should do when you start renting out a property is to ensure that you are paying tax on your rental income.

It is your responsibility to make sure that HMRC know as soon as possible that you are renting out your property. This way you’ll avoid any later problems, understand the form itself, and be able to keep records in order to save up for any tax bill and avoid unwanted surprises. Note that you must let HMRC know even if you are currently making a loss on your property.

The only exception for property self-assessment is when your rental income is less than £4,250 a year from a lodger in your own home which is covered by the rent-a-room allowance.

Deadlines and Penalties

If you have not already submitted the paper return to HMRC, the deadline was 31st October 2014, then you have until 31st January 2015 for electronic submissions. When submitting online your tax bill will be calculated automatically and any profit from the property is added to your income from that tax year. As a result basic rate tax payers will see their income tax on rental profits increased to 20%.

If you fail to inform the HMRC that you are renting out a property, you will likely face an unwanted penalty. You must report income from a property rental of more than £2,500 a year or you could face a penalty ranging quite significantly between £100 and 100% of the amount of tax owed in the most serious cases. Make sure you do not leave it until last minute, whilst the form can undoubtedly cause confusion the systems and help lines see a large rush and in return can delay your process.

Don’t Worry…

As more and more people across the country choose to rent out properties, HMRC receive a multitude of self-assessment forms. Therefore the HMRC have permission to demand additional questions, seek supplementary information and start an investigation into your affairs.

However, as long as your approach the form with an air of caution, reading each section thoroughly, you can easily avoid making any mistakes. The HMRC reported that a large majority of landlords enter their earnings for rental property in the wrong parts. Ensure you mark the section titles ‘other property income’ rather than ‘furnished holiday lettings’. As a result people receive a large tax repayment, (this section is significantly more generous) but are later forced to repay when the error is discovered.

You shouldn’t worry too much if you don’t have the exact figures for some sections when filling out the self-assessment form. Instead provide accurate estimates ensuring that you make HMRC aware of this with explanatory notes in the ‘extra information’ boxes provided. You must let them know the exact figures as soon as possible.  In addition, if you are missing any documents which require you to fill in the form, such as a P60, use your most recent statements and wage slips instead.

What About ‘Allowable Expenses’

The HMRC will not check for any previous self-assessment return loses, so you must do this yourself if you want to receive tax relief which you are owed.

There are a number of potential expenses which can be deducted from your rental income which can leave you with taxable rental profit. Allowable expenses are generally categorised as things you need to spend your money on to ensure the day to day running of the property such as;

  • Letting agents fees
  • Accountants fees
  • Buildings and contents insurance
  • Interest on property loans
  • Maintenance and repairs to the property
  • Council tax
  • Interest on property loans
  • Utility bills like gas, water, and electricity
  • Rent, ground rent, and service charges
  • Services you pay for such as gardening or cleaning

It is important to note that allowable expenses do not include capital expenditure such as buying a property or renovating it beyond what constitutes as repairs for wear and tear.

For example Offset Opportunities are one of the best items you can offset as an expense would be your mortgage interest, however, you can only claim tax relief and not capital repayments. You can easily attain an interest statement from your mortgage lender which can result in deductions from all periods that you, the landlord, were seeking to let the property even whilst it was vacant. There are also many opportunities to release equity from a property and reduce income subject to tax also.

Another big expense subject to tax relief is often Wear and Tear. There are generally two options when claiming here. Either you keep a tally on your annual expenditure or more simply choose to opt for a flat 10% wear and tear allowance. The guidance notes from HMRC state that the allowance broadly covers the cost of normal renewals of furniture amounting to 10% of the rent received.

Did you know about the Landlord Energy Savings Allowance? This special allowance can be deducted for draft proofing and insulation costs of up to £1,500 per year until 5th April 2015. The HMRC have stated for example that the renewal of single glazed windows with double glazed ones can be deducted from taxable profits.

An Alternative Solution

If you are an employee or pensioner and your income is taxed under PAYE you may be eligible to pay any tax from your rented property through your employment or pension. This means that there is no need to complete the tax return forms.

If you rental property is less than £2,500 a year, (gross income minus allowable expenses) and the gross rental income total is less than £10,000, (before expenses deduction) you can ask HMRC to collect any tax through your PAYE code.

You’ll simply need to send the tax office a statement of your rental income and expenses each year and as a result the HMRC will then change your PAYE code in order to collect additional tax from your employment or pension.

Need a Hand?

For more information and advice concerning self-assessment give our team a call on  0117 379 0810 who are happy to help. Alternatively visit the HMRC website for further information and guidelines when filling out the form.

Fran Tyler

Fran heads up First Call Financials. She has over 40 years’ accountancy experience and is a Fellow Member of the Association of Accounting Technicians.

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This post was written by Fran Tyler

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