Welcome to the TaxAntics August 2022 newsletter...

Common property tax queries

The team at TaxAntics have been helping landlords for over ten years. For our August 2022 newsletter, we thought it would be useful to summarise some of the most common questions that arise when we first start talking to our clients.

Choosing an operating structure

Choosing whether to operate your property business either as individuals, in partnership or through a limited company depends on many factors, including other income sources and long-term goals. Our July newsletter considered this further.

As a general rule, where the aim is to hold investments for the long term and profits are not required for lifestyle, plus proprietors have significant other income sources, a corporate structure is often most tax efficient. However, it is always important to take advice specific to your circumstances.

Trading or investment?

It is important to identify whether the activity would be treated as revenue or capital in nature. A common misunderstanding is that a refurbishment and sell (or a “flip”) is subject to capital gains tax. This activity is usually subject to income tax especially where intent is clear, the holding period is short and the process is repeated.

The developing and selling of properties is generally treated as a trading activity subject to income or corporation tax. Losses can usually be offset against other income.

The holding and letting of rental properties is a business, although the activity is unlikely to amount to a trade. Losses can only be carried forward against profits of the same activity.

Finance issues

Only interest and not capital payments are allowable for tax purposes. For traditional buy-to-let residential rental activities undertaken by individuals, finance costs are restricted to a 20% income tax reducer. For limited companies or individuals operating furnished holiday lets, serviced accommodation, a hotel or similar establishment businesses, interest relief is available in full.

The majority of finance arrangements will typically have arrangement and other fees added to the balance. Most of these additional costs are usually revenue in nature and can be allowed in full against income or corporation tax immediately. These costs are often missed and there is no relief available for capital gains tax purposes.

Interest costs of additional borrowing are only allowable to the extent they are used in the property business or do not exceed the original capital contributed by the proprietors. 

Allowable expenses

You can deduct all allowable expenses incurred wholly and exclusively for the purposes of your property business from rental and other property related income (for example, reimbursement of internet or utilities). Allowable expenses include:

• Rent (where subletting), council tax or rates, and insurance costs;
• Repairs and maintenance, including cleaning and gardening;
• Legal and professional fees (management agents, solicitors fees for lease extensions (<50 years) or tenancy renewals (<1 year); and
• Costs of services (light, power, heat).

A basic workbook is available from TaxAntics upon request to help new landlords identify and record their income and expenditure.  More established landlords should now probably be thinking about digitalising their records in preparation for HMRC’s Making Tax Digital (MTD) initiative which is due to be introduced in April 2024.

Pre-letting expenses

Expenses incurred up to seven years prior to the commencement of letting are allowable as if they were incurred on the first day of letting, if they are geared towards preparing the property to be let and are usually allowable.[reworked, please check]For example, redecorating to improve marketability or even replacing a dated kitchen on a like-for-like basis would qualify. Any expense which improves or adds value to the property is capital expenditure and not allowable for income tax purposes.

Administrative costs

The general administrative costs of operating a property business, such as accountants’ fees, stationery, postage, advertising, travel and vehicle running costs to the extent they relate to the property business should also be allowable as a deduction from your property profits.

Replacement of domestic items (RODI) relief

Relief is given as a deduction from profits where residential rental landlords replace domestic items such as:

• Moveable furniture (tables, chairs, beds, etc);
• Furnishings (bed linen, floor coverings, curtains, etc);
• Household appliances (refrigerators, washing machines, audio visual equipment, etc); and
• Kitchenware, such as crockery and cutlery. 

The initial cost of the items is treated as a capital expenditure and the replacement must be on a like-for-like basis to be treated as a revenue expense.

Those operating furnished holiday lets, serviced accommodation, hotels or similar establishment businesses can claim more generous capital allowances instead of RODI relief. We will cover capital allowance claims in a later article.

Summary

Understanding the tax rules and maintaining accurate records are amongst the most important elements to operating a successful property business. Records must be kept for at least five years after the tax return deadline for the accounting period under review. Failure to do so can be catastrophic if HMRC open an enquiry or compliance check. Although HMRC can open an enquiry at random, the reality is that most enquiries stem from an identified tax risk or suspicion that something is amiss. Engaging the services of a reputable tax professional to assist in meeting your compliance obligations and also assist with your long-term retirement and estate planning strategies is recommended. We would say that though!