To Have, Hold & Share Rental Income Tax Efficiently

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As of 6 April 2017 the tax relief landlords receive for mortgage interest and other finance costs is restricted. The restriction is being introduced gradually so that by 2020/21 landlords will receive tax relief for finance costs at basic rate (currently 20%) instead of at the rate at which they pay tax.

This change does not just affect higher rate taxpayers.  Some people may find that, even though they are currently a basic rate taxpayer, as finance costs are no longer deducted in calculating their net rents, their income can be pushed into the higher rate bracket.

For spouses and civil partners who jointly own rental property, in the absence of an agreement to the contrary, the profits will typically be split 50/50. This can however be inefficient for tax purposes if one spouse is a basic rate taxpayer and the other is taxed at higher rate.

In such circumstances, they can register a beneficial ownership on the asset which stipulates a different ownership split, for example 80/20 and submit Form 17 to HMRC in order to tax the profits as such. This should of course be discussed with the experts in application to your personal circumstances before implementing.

If you’d like any further information please contact Green & Co.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Mates Rates – Letting your property at below Market Value

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When you let a property to a third party for a market rent it should be relatively straightforward to calculate your taxable rental income, or loss if applicable. A market rent is that which a landlord can expect to receive in accordance with rents charged for similar properties in the same area. If your rental income exceeds the allowable expenditure incurred the profit will form part of your income and if the allowable expenditure exceeds the income then, assuming you meet all criteria, you will have a loss which you can carry forward and offset against future rental income.

There are some circumstances where a market rent is not charged. For example, a parent may let a property to their child for a lower amount, as parental duty dictates.  In this instance the expenses incurred, such as mortgage interest, landlord insurance, etc., may be greater than the rent received. If this is the case, then the expenses are not sustained wholly and exclusively for business purposes and in strict terms should not be claimed. However the good people at HMRC do allow expenditure to be claimed up to the value of the rent received, therefore resulting in no profit no loss. As a result, however, any actual ‘loss’ will be lost.

Should you have any Landlord tax queries please contact Green & Co on 01633 871122.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Landlords: Is your Tax on the Up from April 2017?

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From 6 April 2017 the relief that Landlords receive for mortgage and loan interest on residential lettings will be restricted. It marks a big change for Landlords as it is estimated that one in five will be affected by the policy.

Under the new rules, by 2020/21, finance costs will no longer be deducted from the rental income received (thus giving relief at whatever rate of tax you pay); instead they will be subject to basic rate relief, currently 20%.

The changes will be brought in gradually so that the following proportion of interest costs will be relieved in the normal way in the respective tax years.

2017/2018                           75%

2018/2019                           50%

2019/2020                           25%

2020/2021                           Nil

The balance of costs for each year will be relieved at basic rate.

This change does not just affect higher rate taxpayers.  Some people may find that, even though they are currently a basic rate taxpayer, when the finance costs are no longer being deducted in calculating their net rent, they may be pushed into higher rate tax.  And relief is only available at basic rate.

HMRC announced this change in 2015 in order to give Landlords time to prepare for the impact. If you haven’t done this already then there’s no time like the present (meaning… act NOW!).

Contact us if you would like to discuss your situation with one of the Green & Co team.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Gwent Landlord Forum – 29 March 2017

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After our first very successful event of the year held in January, we are now well into 2017 and preparing to welcome our Landlords to our next FREE forum on Wednesday 29th March between 6pm and 8pm at The Parkway Hotel and Spa.

We are continuing to provide a broad range of speakers who can shed a light on important matters which might help you make up your minds as to your future as a property investor. As always, our invitation goes out to all who may be interested so if you know someone who is a landlord or thinking about becoming a landlord, please do pass this invitation on to them – we are always happy to welcome new guests.

Speakers:

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Leanne Flanagan, Tax Senior with Green & Co Accountants will be talking about:

  • The final March Budget taking place on 8 March and how the changes announced will affect you as landlords.

Damian Lines, Head of Wills, Trusts and Probate with Rubin Lewis O’Brien Solicitors will be speaking about:

  • All aspects of Estate Planning as part of the important area of Preparing for the Future.

Stephanie Taylor of HMO Heaven will be covering:

  • Her insider secrets on HMOs. Is now the right time to invest?
  • The 5 easy steps to massively increase the rental income on your buy-to-let properties.
  • Real life case studies demonstrating how you can double your rental income.
  • How to enjoy fantastic property cashflow in Newport without any hassle.

Eventbrite - Gwent Landlord Forum

For any enquiries about this event, please contact Katie Williams at Green & Co on 01633 871122, Email: katie@greenandco.com.

Landlords:  Have You Claimed Your Pre-letting Expenditure?

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If you’ve incurred qualifying expenditure at some time prior the letting of your rental property, you can still offset this expenditure against rental income (once it’s received) as long as it meets certain criteria.

You cannot claim for expenses, such as repairs or council tax bills, which you paid while the property was your private residence, as this expenditure is not for the purpose of the rental business. There are also restrictions on expenditure incurred when a full market value rent is not charged.

In order to qualify, pre-letting expenditure must meet the following:

  • It must be incurred wholly and exclusively for the purposes of the rental business
  • It has to have been incurred no more than seven years prior to the commencement of the rental business
  • It cannot otherwise be allowable as a deduction for tax purposes
  • If incurred after the rental income commenced, the expense would have been allowable, and
  • It cannot be capital expenditure.

The expenditure, if allowable, will be treated as incurred on the day in which the rental business commenced.

For queries relating to this or any other Landlord tax matters, please contact Green & Co.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

 

 

Tax Relief When Home is The Office

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When a business is operated through premises that are owned or let by the business, claiming for rent, rates and utilities, etc., is all relatively straightforward. However, when the business is run from the home of the proprietor or director (if a limited company), then the expense claim requires a little more thought.

If you wish to claim an apportionment of the household bills, as opposed to the flat rate allowance set by HMRC, then a number of factors should be considered for the calculation.

The area of the home used for business purposes (this can be expressed in terms of floor space or number of rooms) and the time in which that area is used for work should be established in order to apportion the bills.

If a room is used exclusively for the business, then it will not qualify for private residence relief so capital gains tax could be due when the house is sold. Therefore the room should also be used for domestic purposes to ensure the capital gains exemption.

Directors cannot claim any proportion of rent, mortgage interest, or council tax.  However, they can charge the company rent for using their home and claim allowable, apportioned expenditure against the rental income. The rental income would have to be declared on the director’s self-assessment tax return.

Certain occupations have specific allowances and thresholds which have been agreed with HMRC, for example child minders, and these should be observed where applicable. For help and advise on this, please contact our tax team on 01633 871122.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

 

To Have & To Hold (& Split Rental Income Efficiently)

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Spouses or civil partners who receive rental income should consider the way in which the rental income is split in accordance with their prospective tax rates. For example if, before rental income, Mrs Jones is a higher rate tax payer and Mr Jones is a basic rate taxpayer, it may be more tax efficient for any rental income received from jointly owned property to be assessed on Mr Jones.

If the legal title of the rental property is in the name of both spouses then HMRC will normally treat the rental income received from this property as arising 50/50 to each spouse. However solicitors can draw up a declaration of trust to register a different beneficial interest and the percentage can be decided in order to achieve the most tax efficient split.

For HMRC to recognise a differing beneficial interest where the property is in joint names a certified copy of the declaration must be submitted to them along with HMRC’s form 17. This must be done within a specified number of days of the declaration otherwise HMRC will continue to regard the rental income as arising 50/50.

A declaration of trust can also be used where a property is in the sole name of one of a couple so that the rental income can instead be assessed on both spouses.

There are other considerations should spouses or civil partners wish to register a declaration of trust; for example, whether a mortgage is in place, the details of their Wills and the implications should the couple separate or divorce. Both legal and taxation advice should be sought if you are considering a declaration of trust.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Image courtesy of Master isolated images at FreeDigitalPhotos.net

Changes To Interest Relief For Landlords

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In the budget last Summer, The Chancellor announced that landlords will no longer be able to deduct 100% of their mortgage or loan interest costs from their rental income to calculate assessable profit.

Instead they will be able to claim the interest amount as a basic rate reduction from their tax liability.  This means that basic rate tax payers will be unaffected, but if you are taxed at the higher rate you will lose out.

The changes will be brought in gradually over 3 years commencing 6th April 2017, allowing a lower percentage of finance costs to be deducted from profit as follows:

2017/2018                   75%

2018/2019                   50%

2019/2020                   25%

2020/2021                   Nil

The balance of costs for each year can be claimed as basic rate relief .  Any excess can be carried forward to the next tax year.

It is estimated 1 in 5 landlords will be affected by the changes.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Receiving Rental Income: Should You Be Completing A Tax Return?

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Rental income does have to be disclosed to HM Revenue and Customs but whether or not you have to complete a tax return to disclose the income will depend on your circumstances.

You will not need to complete a tax return if:

  •  The gross rental income is below £10,000 per annum, and
  •  The net rents you receive after expenses are less than £2,500, and
  • You have no other taxable income

In these circumstances you merely need to report the income to HMRC.

If your income falls outside the above limits you will need to register for self assessment and complete tax returns.

For those landlords who have not realised that they should be reporting this income, HMRC have launched a let property campaign which will provide the opportunity to bring your affairs up to date and get the best possible terms to pay the tax you owe. This facility is not available to companies or trusts.

There are various expenses you can claim against the rental income, e.g. repairs, mortgage interest, rates, insurance…the list is extensive. The position for repairs is complex as HMRC only allow repairs which are classed as a revenue expense as opposed to capital, for example where a repair is actually a refurbishment or an improvement.

Should you require further information please do not hesitate to contact Green & Co

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

Image courtesy of jscreationzs at FreeDigitalPhotos.net