We have recently had many requests to help with self assessments for individuals who rent out residential properties, so we thought it would be useful to write an article touching on some of the recent changes. We would also be happy to have a free of charge meeting to understand your personal situation.
Firstly, let HMRC know
If you rent out a residential property you must contact HMRC and let them know about your property if the property rental is less than £2,500 a year. You will need to report it on a self-assessment if its;
- £2,500 – £9,999 after allowable expenses
- £10,000 or more before allowable expenses
If you don’t usually send a tax return you need to register by 5 October following the tax year you had rental income.
What about if you haven’t declared rental income in the past?
You can declare unpaid tax by telling HMRC about rental income from previous years. If you have to pay a penalty it’ll be lower than it would be if HMRC were to find out about the income them-selves. You’ll be given a disclosure reference number. You then have 3 months to work out what you owe and pay it.
What do you pay tax on?
You or your company must pay tax on the profit you make from renting out the property, after deductions for ‘allowable expenses’.
Allowable expenses are things you need to spend money on in the day-to-day running of the property.
Allowable expenses don’t include ‘capital expenditure’ – like buying a property or renovating it beyond repairs for wear and tear.
Reform of the wear and tear allowance
The Wear and Tear Allowance for fully furnished properties will be replaced with a relief that enables all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings, appliances and kitchenware in the property effective from 6 April 2016.
The relief given will be for the cost of a like-for-like, or nearest modern equivalent, replacement asset, plus any costs incurred in disposing of, or less any proceeds received for, the asset being replaced.
Finance costs will be restricted to the basic rate of Income Tax, this will be phased in from April 2017
The amount of Income Tax relief landlords can get on residential property finance costs will be restricted to the basic rate of tax.
The changes will:
- affect you if you let residential properties as an individual, or in a partnership or trust
- change how you receive relief for interest and other finance costs
- be gradually introduced over 4 years from April 2017
Finance costs won’t be taken into account to work out taxable property profits. Instead, once the Income Tax on property profits and any other income sources has been assessed, your Income Tax liability will be reduced by a basic rate ‘tax reduction’. For most landlords, this’ll be the basic rate value of the finance costs.
These reforms mean that the way taxable income is calculated will change and that may have other implications for some. For example, if you or your partner receive Child Benefit and your income is over £50,000 the High Income Child Benefit Charge may apply.
Carly and Ellie Allchurch
ALLCHURCH & CO. Chartered Accountants