FACT SHEET ON LETTING A RESIDENTIAL PROPERTY If you own (whether in full or partially) property which is let out, you will need to report the rental profits or losses on a self assessment tax return. Thus renting property for the first time may require you to register for self assessment using HMRC form SA1 (unless you are already having to do a tax return for other reasons). You need to register by 5 October following the tax year in which rental income first arises to avoid a possible penalty. Where you first start to let out a property, you will need to compile the following information: In Connection with any possible Capital Gains Tax when you eventually sell: 1. The full postal address of the property being let out. 2. The date the property was bought. 3. A copy of the completion statement showing the date and cost of the purchase, together with incidental costs of purchase such as stamp duty, search fees, legal fees, estate agents costs etc. 4. The dates (month and year) between which the property has ever been your main home, if relevant. 5. The date the property is first let out. In connection with Income Tax in respect of the let property: 6. Ideally, completed spreadsheets recording the items shown below. We can provide you with the spreadsheets you need. 7. The rental income. Ideally, we need to know the dates from which and to which each month the rent relates. This is because the rental accounts need to be prepared on an accruals basis, not a paid basis. For example, if you receive a monthly rent from the tenant of 2,000 on 25 March which relates to the period from 24 March 2013 to 23 April 2013, only 774.19 ( 2,000 x 12/31 days) will fall within the 2012/13 tax year, whilst the balance of 1,225.81 ( 2,000 x 19/31 days) needs to be carried as income for 2013/14. 8. Rental outgoings. These include: a) Landlord / Building insurance (content insurance is often the liability of the tenant). b) For flats, the service charges and ground rent. c) Repairs and maintenance. Only revenue type costs can be deducted from the rental income. Capital type costs will be added to the original cost of buying the property with tax relief on these costs only available when you sell the property (see Appendix 1 for a worked example). HMRC s manuals at PIM2020 has more detailed guidance on the distinction between revenue and capital costs on Registered in England Registered Number: 04744238 Registered Address: 62 The Street, Ashtead, Surrey, KT21 1AT Registered with the Chartered Institute of Taxation as a firm of Chartered Tax Advisers Director: David John Beckman MA (Cantab) ACA CTA FPC VAT No: 812 3468 46
property. In summary, it is a revenue cost where you repair or restore an asset and there is no significant improvement to it beyond its original condition. Where any improvement arises simply from using more modern materials or techniques which are broadly equivalent to older materials (an example would be replacing single glazed windows with double glazed), the cost can be deemed revenue and thus deductible from the rental income. HMRC takes the view that any improvement has arisen only because of the use of new materials that are now standard and accepted to be broadly equivalent to older materials. However, if the repair/restoration is such as to mean a substantially improved whole which has been upgraded other than simply through the use of new style materials, HMRC is likely to argue that the new whole is capital in full (an example might the complete stripping out of an outdated kitchen and replacing with new units, worktops etc.- likely to be 100% capital) rather than simply replacing the cabinet fronts (more likely 100% revenue). The more detail shown on builders invoices, the better for distinguishing between revenue & capital. d) Water rates (to the extent this is not paid for by the tenant). e) Gas safety certification costs. f) PAT testing costs. g) Council tax costs for any vacant period. h) Lighting and heating costs for any vacant period. i) Managing agent s fees if relevant. j) Agent s finder s fee for securing tenants. k) Legal fees re contracts. l) Inventory fees (to the extent this is the liability of the landlord often shared 50% with tenant). m) Gardening costs. n) Travel costs at 45 pence per mile where you manage the property yourself. o) Accountancy costs (to the extent that tax relief on your accountant s fees have not been claimed elsewhere). p) Mortgage interest on any loan (but not the capital repayments) where you can argue the capital has been used to buy or improve the rented property. The loan can be taken out and secured on your main home and does not need to be designated specifically as a buy to let mortgage in order to avail of tax relief on the interest payments. You must be able to demonstrate if need be that the interest was paid wholly and exclusively in connection with your rental business, and was not personal. Note that where costs relate to a period extending beyond the tax year end of 5 th April (for example the insurance, service charges, ground rents etc), please provide copy invoices or show on the spreadsheets the period covered by the cost. As with the rental income, costs need to be apportioned between the period relating up to 5 th April and the period relating beyond this date (see 7) above for a worked example) q) If the property is let furnished, you can claim a deduction of either: - A wear and tear allowance of 10% of the net rent ; OR - A renewals basis. This means the cost of replacing a particular item of furniture (but not the cost of the original purchase).
You need to select which of these two options is best for you and stick with it. You cannot chop and change the method from year to year. A furnished property is one that is capable of normal occupation without the tenant having to provide their own beds, chairs, tables, sofas and other furnishings, cooker etc. The provision of nominal furnishings will not meet this requirement. If the accommodation is not furnished or is only partly furnished (i.e. just white goods and cooker), the 10% wear and tear allowance is not due. The net rent is found by deducting from the rental income for the year charges and services that would normally be borne by a tenant but are, in fact, borne by the taxpayer - for example, council tax, water and sewerage rates. The 10% deduction is given to cover the sort of plant and machinery assets that a tenant or owner-occupier would normally provide in unfurnished accommodation. These are things like: movable furniture or furnishings, such as beds or suites televisions fridges and freezers carpets and floor-coverings curtains linen crockery or cutlery plant and machinery of a type which, in unfurnished accommodation, a tenant would normally provide themselves - for example, white goods cookers, washing machines, dishwashers & fridges. Note that in addition to the 10% wear and tear allowance, you can also deduct the cost of repairing or even renewing fixtures that are an integral part of the building. Fixtures integral to the building are those that are not normally removed by either tenant or owner if the property is vacated or sold, for example, baths, washbasins, toilets, central heating installations. Again, you cannot claim for the original cost of installing these fixtures. If you replace an old cheap bathroom suite with a more expensive, high quality suite, you can deduct the cost, as a revenue item, of replacing like with like, but not the extra cost of the new, better items (see HMRC Manuals at PIM3200). r) If the property is let unfurnished, you can claim the cost of renewing fixed items such as baths/sinks/boilers but from April 2013 HMRC s view is that you cannot claim the cost of renewing freestanding items of equipment (e.g. fridge/freezer). If you can argue that the fridge or freezer is actually fixed within the kitchen, you could claim the cost of renewing this item. An unfurnished property is a property that is not let furnished (see q) above for both the definition of furnished and of how the renewals basis works). If you have never resided in the property as a main home at any time, the CGT will essentially be the difference between what you sell the property for and what you paid for it, plus any capital improvements. There is an example of the CGT calculations in Appendix 1.
The CGT savings can be huge provided you have lived in the property as your main home. HMRC is increasingly challenging claims that a property has been a main home, especially in the context of buy to let properties. The following will help you in any claim that the property, at some point, has been your main home: a) You will need to have resided in the property for a reasonable length of time. There is no statutory definition of a reasonable time, but we suggest at least six months. b) You will need to assemble good evidence that the property was your main home. This could include: (i) Electoral register (ii) Home phone bill in your name at that address (iii) Council Tax bill (iv) Letter from HMRC at that address (v) Pictures of family parties/furniture at that address c) There should be some quality of residence this means an indication of some degree of permanence, some degree of continuity or some intention/expectation of continuity to reside in the property as your main home. HMRC has successfully denied principal private residence (PPR) relief for CGT in court cases where for example: - it was probable that the intention was simply to sell the property as soon as possible, such that any residence was purely to obtain PPR relief; and/or - the person was living out of suitcases/in one bed in the house whilst they kept most of their possessions at another property. I can provide another factsheet which details the evidence you may need to provide for a court to be satisfied that PPR relief is available. This fact sheet covers the letting of residential property (usually for a minimum six month assured tenancy period). If you have a furnished holiday letting (usually let for no more than 31 days to the same person in any one month), then see our separate fact sheet. Tax Planning Ideas to Reduce Income Tax A Where the higher earner is a higher rate taxpayer and the lower earner is not, consider transferring the rental property: - From sole name to joint names; or - From Joint Ownership to Tenants in Common so that the split can be other than 50:50. The transfer should be done through a solicitor by a Deed. All or some of the rental income could then be reported solely on the tax return of the lower owner who now owns the property in his/her sole name. If you are married, this transfer will be exempt for CGT purposes. If you are not married, the transfer will be subject to CGT. Provided no consideration is given for the transfer (in other words, it is a pure gift), there should not be any Stamp Duty Land Tax on the transfer.
However, HMRC can easily argue there has been consideration, for example where the transferee subsequently takes on responsibility for paying the mortgage from the transferor. (i) Married couples and civil partners the income must be split in the same proportion as the underlying property is owned. If you want to split the rental profits other than 50:50, this is possible but only if you: - Have first transferred the property from joint tenants to tenants in common as mentioned above. - Declare that the beneficial interest is other than 50:50, say 90:10. - Submit a Form 17 to HMRC along with evidence that the beneficial interest in the property is other than 50:50. - Actually share the rental income and costs in proportion to the declared split. Married couples can also split rental profit other than 50:50 if there is a formal partnership. However, to be an official partnership business, this usually involves some significant degree of operation, such as laundry/food etc, other than the pure letting of property. (ii) Joint owners other than married couples or civil partners can decide on an entitlement other than 50:50 or other than the actual way in which the underlying property is owned. If you have not declared to HMRC that income is other than 50:50, you must report the rental profit 50:50. HMRC is specifically targeting evasion of tax where the rental profits are not being declared for example by the higher tax payer. Other factors to consider before transferring property from one of you to joint names or splitting the income other than 50:50 are will the different split of income : adversely affect the working tax credit claims (if relevant)? reduce the tax payable at higher rates for the higher earner? reduce or even eliminate the high income child benefit charge (applicable where one of you as couple has gross income > 50,000)? The rules for how income from rented property is split are complex (see for example HMRC manuals PIM1030). We therefore recommend that you take advice before acting. Tax Planning Ideas to Reduce Capital Gains Tax (CGT) B. Transferring property into joint names will probably save CGT on a sale (not always - see below). This is because annual exemptions worth currently 22,200, rather than just one exemption of 11,100) would be available to reduce the chargeable gain.
If you are not married, the transfer to your partner could trigger CGT before the sale, so take advice. C. Having the property in joint names could double the letting relief (see Appendix 2) from a maximum of 40,000 to 80,000, again saving substantial CGT. D. For married couples, the timing of a transfer from sole to joint names can have a significant impact on the overall CGT payable. If a buy to let property is held in sole name and has never before been the PPR but you are considering making that property your main home, the transfer into the name of the other spouse (jointly or solely) should be done before you move in and the property becomes the PPR. Another instance where it may be best for a property to be held in just one person s name is if a property is to be the PPR, then be let out for quite a few years before reverting back to being the PPR again after the letting ceases. Again here, there could be substantial CGT savings if the property is transferred into the name of the other spouse (jointly or solely) shortly before you both move back into the property as your PPR. Overseas Landlords holding UK rental property We suggest you seek further advice from us if you have moved overseas and are renting out your UK residential property. There are issue for income tax, in particular, the presumption that 20% tax will be stopped at source on rental income. Also non-resident landlords are potentially liable to CGT when they sell their UK properties with effect from 6 April 2015. We strongly recommend that you obtain two independent valuations for your property as at 6 April 2015 so that only a gain arising on the property after this date will be potentially taxable to CGT. With effect from 6 April 2015, a property cannot be treated as your main home for a tax year if it is located in a country in which you are not tax-resident and it is a property in which you (or your spouse) spend fewer than 90 days in the year. SEE APPENDICES on next pages for worked examples
APPENDIX 1 The let property has never been your main home When you sell, the CGT computation will be calculated as shown in the following example: Sale Proceeds on sale 245,000 Less: Incidental costs of sale - Estate Agents fees ( 2,940) - Legal Fees ( 850) 241,210 Less: Original Cost 160,000 Add: Incidental costs - Estate Agents 1,920 - Stamp Duty 1,600 - Legal fees etc 750 ----------- (164,270) Less: Capital Improvement Costs (say) (35,000) (see item 8 c above) Chargeable Gain before Annual Exemption 41,940 If you have made no other capital disposals in the tax year, then the first 11,100 (for 2015/16) of gain is covered by the CGT annual exemption. Assuming this to be the case here, the chargeable gain after the annual exemption will be 30,840 ( 41,940 less 11,100). This will mean CGT payable of between 5,551.20 (being 30,840 x 18%) and 8,635.20 (being 30,840 x 28%). How do you tell whether the gain will be taxed at 18% or 28%? STEP What You Need to Do 1. Calculate your total gross income from all sources in the tax year. Suppose you earn 30,000 gross from all sources in 2015/16. 2. Take the higher rate threshold of 42,385 (for 2015/16) and deduct your total gross income for the year. The result = 12,385 (being 42,385 less 30,000) 3. Where the result is positive and the chargeable gain is more than this figure, 18% CGT will apply to the 12,385 result in 2. above, meaning CGT at 18% of 2,229.30. 4. Where the gain exceeds the result in 2. of 12,385, the balance of the gain is taxed at the higher rate of 28%. In the worked example above, total chargeable gain = 30,840, of which 12,385 has been taxed at 18%. This means the balance of 18,455 ( 30,840 less 12,385) is taxed at 28%. This means CGT at 28% of 5,167.40. 5. Add together the tax calculated in 3. to the tax calculated in 4. to see the total CGT due of 7,396.70. This tax will be due by 31 January following the end of the tax year of sale. In this example the sale took place in 2015/16, so the CGT will be due by 31 January 2017.
APPENDIX 2 The let property has been your main home at some point in time Using the information in 1. to 5. above, the chargeable gain figure in Appendix 1 above will be revised as follows: Assuming the same gain as calculated in Appendix 1 and then assuming the following: DATES - Date first acquired (work done before moved in) 1 April 2001 - First became principal private residence (PPR moved in) 1 April 2002 - Ceased to be your PPR 1 April 2007 - Property first let out 1 May 2011 - Property ceased to be let out 30 Apr 2015 - Property sold 1 Dec 2015 The revised gain will be: Gain before Reliefs 41,940 Less: PPR Relief No, of Years - Period of actual PPR 5.0 years - Period of deemed PPR (maximum of last 1.5 years) 1.5 years ------ 6.5 years ------ - Period of total ownership 14.667 years ------ 41,940 x 6.5 years / 14.667 years (18,586) ----------- Gain after PPR Relief 23,353 Less: Letting Relief This is the lowest of: - Absolute Limit 40,000 - Exemption due to PPR relief 18,586 - Gain after PPR Relief 23,353 (18,586) Gain after Letting Relief 4,767 Less: Annual Exemption (restricted) (4,767) Total Chargeable Gain Nil Thus, the occupation of the property as the main home for just 5 years has reduced the gain before annual exemption to Nil and saved nearly 7,400 of tax (see Appendix 1). In addition, the balance of 6,333 of the annual exemption of 11,100 is now available to be used to offset against any other capital gains in the year. 62 The Street Ashtead Surrey KT21 1AT Tel: 01737 844322 Fax: 01737 844162 Email: david@dbeckman.com This fact sheet is for information only. It provides an overview of the regulations currently in force and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, no responsibility for loss occasioned by any person or refraining from action as a result of this material can be accepted by the authors or the firm.