Mon, 17 Sep 07
It is not uncommon for landlords to pay too much tax because they are missing out on the many tax allowances they are entitled to, according to local letting agent Leaders - one of the UK’s largest independently owned letting specialists...
Any profit made from letting a property is subject to UK income tax, whether the landlord is resident in the UK or not, and must be reported in a Self Assessment Return. However, certain deductions are allowable and Leaders believe that, with the growing numbers of buy to let investors entering the market for the first time, many landlords may not be aware of them.
With Tax Returns due by 30th September (if you want the Inland Revenue to do the calculations for you) or 31st January next year (if you will be doing the calculations yourself or using an accountant to do so), Leaders wish to remind landlords of their tax obligations, and of the allowances they are entitled to.
Says Leaders’ managing director Paul Weller: Landlords should bear in mind that they are permitted to make certain deductions from their rental income before calculating profit, although these deductions are only applicable when the property is being let or is available for letting.
We strongly advise landlords to keep all receipts and letting agent statements to prove income and expenditure relating to the rental of your property. If you have an organised filing system for your records, your Tax Return will be much easier to complete and you won’t end up paying more tax than is strictly necessary.
Allowable deductions include the cost of:
- Mortgage interest on loans used to purchase the rented property or to fund improvements.
- Your agent’s letting and management fees.
- Repair and maintenance of the property and contents (but not the cost of improvements).
- Ground rent and maintenance charges on leasehold property.
- Water and sewerage rates unless charged to tenants.
- A wear and tear allowance applicable to furnished property only, equal to 10% of the gross rent received (less council tax and water rates) or you can deduct the cost of replacement from the rental income in the relevant tax year.
- If you pay someone to assist with the work involved in letting your properties, the cost is allowable if you can prove that they are paid at local commercial rates and they report the income in their own tax return.
- Council tax whilst the property is vacant.
- Accountant fees.
- Legal expenses (but not those relating to the purchase or sale of the property).
- Stamp duty on tenancy agreements.
- Building and contents insurance and any insurance claim fees.
- VAT on all charges where applicable
To qualify for the wear and tear allowance, the property has to be furnished sufficiently to meet the ‘eat, sit, sleep’ rule; i.e. sufficient and appropriate furniture and furnishings must be provided for all rooms.
Other costs not mentioned above may be allowable if accurate records are kept, but landlords would need to discuss the details with their accountant or the Inland Revenue.
In the case of landlords who are resident abroad for more than six months in any tax year, they are generally classified as non-resident landlords but income tax is still payable.
Says Paul: If the tax affairs of non-resident landlords are up to date, they can complete an NRL1 form, which your letting agent should provide, to apply for exemption from having tax deducted from your rental income at source, although the income is still taxable and must be reported in the self assessment tax return.
The Inland Revenue regularly inspect letting agents’ records to make sure that non-resident landlords’ taxes are being properly dealt with and at Leaders we are particularly careful when dealing with ‘care of’ addresses, where the landlord may have given a UK contact address while living abroad.
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