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Tax Return and Not Sure About Income

Aug20

Q. I don’t have the all the figures needed to complete the tax credits renewal form, and I’m worried I’ll lose my tax credits as the deadline is 31 July. The main problem is my income is as a musician as I don’t know what my total income is until I receive the royalty statements.

A. Don’t panic. You are required to return the tax credits renewals form by 31 July, or renew by phone, but you can submit estimated figures for 2011/12. When your self-employed accounts are ready you can submit the final figures and your tax credits award will be adjusted as necessary. As long as you submit final figures by 31 January 2013 you should not lose your tax credits.

 

If you would like any further information, please do not hesitate to contact Southside Accountants Wimbledon & London.

A guide to Income from Property

Jan23

Rent a room relief – income tax

Where a home owner lets part of his main residence to a lodger, rental income is only chargeable to income tax to the extent that it exceeds £4,250. There is no limit to the number of rooms, but only £4,250 in total is exempt. This figure has remained unchanged since 1997-98. HMRC state that income from property that is within the total exemption is to be disregarded for tax return purposes.

 

Buy to Let

Letting property, a ‘business of letting’ for income tax purposes, is not a trade, but is treated as one for many tax purposes. Expenses available include:

 

  • advertising for tenants
  • rent collection costs
  • bad debts
  • agents’ charges for management
  • accountancy fees for accounts preparation
  • repairs to property
  • If the property is let furnished, 10% wear and tear allowance (i.e. 10% of net rental income, excluding rates, water rates and council tax if paid by the landlord) will be deductible for income tax.

 

Capital expenditure is not allowable.

 

Interest paid

Interest paid on loans used to buy the land or property used in the rental business, for improvements or alterations, repairs etc. will be deductible, together with incidental costs of arranging loan finance.

 

Using the home loan

People often use the equity in their own home to fund buy to let properties. It does not matter what the borrowing is secured upon, provided the interest is incurred wholly and exclusively for the purposes of the business of letting.


Joint accounts

It may be the case that the buy to let property is in one person’s name but the main residence is in joint names. HMRC usually normally allow relief for the home funded interest provided the letting business bears the cost of the interest. It is advisable to ensure that money passes from the business account to the joint account to fund the interest.

 

Losses

Losses can only be set off against other income from UK property (if they are losses from UK property) or overseas property if they arise from overseas property. The two exceptions are losses arising from capital allowances which can be offset against other income or furnished lettings losses (see below).

 

Furnished Holiday Lettings (FHLs)

 

Tax reliefs

Furnished holiday lettings in the UK (and latterly the EEA) have traditionally received certain favourable tax treatments normally afforded to trades.

 

However, 6 April 2011 and 6 April 2012 saw some important changes to the regime.

 

From 6 April 2011, it was no longer possible to set off losses arising on a furnished holiday letting against general income (or capital gains). After 2010/11, you are only be able to carry FHL losses forward against future profits from furnished holiday lettings.

 

The following tax reliefs, remain in force beyond 6 April 2011:

  • Various capital gains tax reliefs, such as roll-over relief for reinvestment in business assets, hold-over relief for gifts, entrepreneur’s relief and relief for loans to traders.
  • Availability of capital allowances.
  • Income qualifies as relevant earnings for pension purposes.

 

Qualification as an FHL:

 

From 6 April 2012, the eligibility criteria for qualification as a furnished holiday letting has changed:

 

For a property to be qualified as an FHL, it must meet the conditions set out in s325, ITTOIA 2005, broadly:

 

  • The property must be available for letting to the general public not less than 210 days in the tax year; and
  • The property must be actually let to members of the public for at least 105 days in the tax year.

 

Prior to 6 April 2012, the eligibility criteria is as follows:

  • The property must be available for letting to the general public not less than 140 days in the tax year; and
  • The property must be actually let to members of the public for at least 70 days in the tax year.


Transitional Relief:

There is an element of transitional relief available on the shift to the new rules from April 2012. Where a business fails to meet the stricter ‘actually let’ let requirement for a period of one or two years, it will be possible to elect for FHL treatment to continue for 2011/12 and subsequent tax years.

 

VAT

Holiday accommodation is standard rated for VAT. If the owner has a significant portfolio of properties, his total turnover may exceed the VAT registration threshold. Where a property is situated in another EEA country, local VAT must be charged if that country’s threshold is exceeded; Spain, for example, has no exempt threshold.

If you would like any further information, please do not hesitate to contact Southside Accountants Wimbledon and London.

What expenses are allowable against rental income?

Jul26

Broadly speaking, in calculating rental  profits a taxpayer can deduct business expenses so long as they are:

  • incurred wholly and exclusively for business  (rental) purposes; and
  • are not of a capital nature.

It is not possible to set out all the expenses that are allowable for tax purposes in all circumstances but some idea of the main types of expenses that are likely to arise in a rental business and also some idea of what can or cannot usually be claimed as a deduction in calculating rental business profits are covered in this post.

For an expense to qualify the business purpose must be the sole purpose. A non-business or private purpose prevents any deduction from business profits where there is no objective yardstick by which any business element can be distinguished from the non-business element.

Examples of deductible expenses include:

  • Repairs and maintenance;
  • Interest paid;
  • Capital allowances;
  • Wear and tear or renewals allowance;
  • Travelling expenses;
  • Legal and professional fees;
  • Managing agent’s fees;
  • Insurance;
  • Rents and ground rents paid;
  • Lighting, heating, cleaning, gardening, security, caretaking etc.;
  • Advertising;
  • Accountancy fees for preparing the accounts and agreeing taxation liabilities;
  • Council tax, business rates and water rates – if paid by the landlord;
  • Bad debts and the cost of pursuing debts;
  • Staff costs, including statutory redundancy pay and training.

Repairs and maintenance

  • Expenditure on repairs is deductible, including ordinary repairs and decorating before the building is first let;
  • Expenditure is not deductible for the cost of alterations and improvements, or the cost of bringing a newly bought building into a fit state for letting. These are capital expenses;
  • Expenditure reimbursed by insurance is not deductible.

Interest

Interest payable for the purpose of the property letting business can be deducted in the accounts. This includes interest on a loan to buy or improve the property or to fund repairs.

Travelling expenses

  • Travelling expenses are allowed if they satisfy the ‘wholly and exclusively’ rule. For example, the costs of travelling, solely for the purpose of the business, are allowed between let properties, or to a let property from the place where the rental business is administered;
  • Travelling expenses are not allowed if private purposes are included in the travel, such as personal shopping or family visits;
  • Where the business is administered from the landlord’s home, the cost of travelling from there to the properties is unlikely to be allowed if the home is far away from the properties, as the need for the journey is considered to be dictated by the personal preference of the landlord to live in a particular place, rather than the needs of the property business.

Legal and professional fees

  • Fees on the purchase of a property or for the first letting agreement are treated as capital expenses and are not tax-deductible, if they are for a period of more than a year;
  • Fees for a letting agreement of less than a year, or for renewing a lease for less than 50 years, are deductible;
  • Other professional fees, which are normally allowed, are those for insurance valuations, and for evicting an unsatisfactory tenant in order to re-let the property.

Income from property is affected by a large number of tax rules – the reasons for this are the variety of uses to which property can be put, and the different ways in which income and profits arising from property can be taxed. Substantial profits can be made on single transactions, making tax planning important. The large volume of tax legislation affecting property means that the precise way in which a transaction is structured can significantly affect the tax payable.

If you would like any further information, please do not hesitate to contact Southside Accountants Wimbledon & London.