Home Front logoLandlords – Time to get your Taxes in order!

For two years HMRC has been focusing on property owners. It has launched a number of campaigns warning against the failure to declare both rental income and the gains made when selling property that is not your home. Currently Fewer than 500,000 taxpayers are registered with HMRC as owning properties other than their home. And yet other sources put the number of Britain’s growing army of landlords at between 1.2million and 1.4million. Now, accountants warn, it is getting serious. HMRC typically announces its campaigns and task forces and gives people an opportunity to come clean, and then it acts. A sharp recovery in property values, especially in London could also mean people now selling have a capital gain to declare. For instance homeowners who kept hold of property when the market was weak will look to sell now, and that could mean a need for some owners to plan around the tax. Smaller landlords with one or a few properties are likely to declare property earnings via self-assessment; whereas larger landlords will probably and wisely so use an accountant. Income arising from rental property is treated very differently from gains made when properties are sold. As a rule of thumb, income can be legitimately reduced to the extent that most landlords need not pay tax. It is more difficult to avoid being taxed on gains – where landlords face either the capital gains tax regime, or, at their death, inheritance tax. Mortgage interest is the primary cost which landlords are allowed to offset against incoming rent, thus reducing taxable income. So to some extent it pays to have a mortgage on the property which is why most landlords tend to use interest-only loans where the capital is not repaid. But mortgage interest is not the only expense which landlords can legitimately use to offset rent. Repairs and maintenance outlays are also allowed, provided they are not “improvements”. Lettings agents’ fees, mortgage brokers’ fees, ground rents, service charges, insurance, accountants’ costs and other staff expenses incurred in the business of letting the property are also allowed. The list is substantial. There are two basic ways of limiting a capital gains tax bill on selling an investment property. The first is to ensure you deduct all the allowable costs from the gross gain. These include stamp duty paid and the cost of any improvements. Landlords should apply all allowable expenses to produce a lower net gain which would then be subject to capital gains tax. The second means of reducing the taxable gain is through making use of allowances associated with your having lived in the property.  If a property has been your main home, at any point, you can usually claim tax relief for the last three years’ ownership. There is another relief called private letting relief, which could allow a further £40,000 of any taxable gain to be avoided. More serious landlords who build a portfolio of multiple properties over many years will find it difficult to legitimately avoid both capital gains and inheritance tax. HMRC has a number of tools at its disposal to track down Landlords including their own records and resources and since 2007, when tenancy deposit protection rules came into force, all rental deposits have had to be protected by an authorised deposit scheme. The measure was designed to protect tenants but it added a useful string to HMRC’s bow. The schemes have to collate data about both landlords and properties – again accessible to tax officials. On top of this, councils too are actively updating their registers of landlords. So don’t be caught out, hire an accountant and get your house in order before that inevitable knock on the door comes.