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How to protect property rental income – Part Five

September 17, 2017

Tips from property tax accountants Optimise Accountants on how to protect property rental income

By Louise Misiewicz

Are you maximising the profitability of your property?

How can you increase the rental incomes generated?

One of the main areas of interest to my property investor clients is how to maximise property rental income. This ensures that their property portfolios are working hard and delivering a consistent return.

In a recent buy-to-let landlord consultation, a number of key considerations came to light, and I’ve turned this into a blog serialisation, as you can see below:

Part One of the blog series from last week can be read in full here – Administration and allowable costs.

Part Two of this article series can be seen here and reviewed fully – Correctly identifying income and costs.

Part Three of the blog series can be seen in full here and reviewed – Receipts to review and keep hold of.

Last week’s Part Four of the article series can be seen in full here – properly assessing expenditure items.

In Part Five this week, I’m taking a closer look at further considerations for property investors looking to ensure that they maximise the rental income return on their property portfolios in the UK.

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Here are more of the considerations I reminded my buy-to-let landlord client of during our phone call:

Question: Have any capital repayments been excluded from loan interest and other finance charges?

I advised my landlord client that only the loan interest is an allowable deduction in assessing the rental profit or loss for tax purposes. If the capital payments are not separated from the interest, for mortgage repayments for example, the rental profits will be understated.

Review the mortgage or loan statements and separate the capital repayments from the interest payments.

Ensure that only the loan interest payable in respect of the let property is included in assessing the rental profit or loss.

Question: Have any ‘dual purpose’ expenses been apportioned in repsect of any property that’s used only partly for rental business?

I told my property investor client over the phone that where any expenses are in respect of a property that is used partly for the rental business and partly for private or non-business, expenditure should be apportioned accordingly.

For example, loan interest where only part of the property has been let or only part of the loan has been used for the purposes of the rental business.

Expenditure relating to life insurance policies (for example a mortgage protection policy) on business loans and mortgages is not exclusively for the purposes of the business, and therefore is not an allowable deduction against rental income for tax purposes.

I reminded my landlord client that the incidental costs of arranging business finance are normally allowable, but the cost of monthly life insurance premiums are not.

Establish the amount of any non-rental business related expenditure and ensure that this is excluded in computing the rental profit or loss. A review of payments made to financial institutions may identify non-business payments, for example, life insurance premiums.

Ensure any ‘dual purpose’ expenses have been apportioned correctly, and check with your property tax accountant if you’re unsure.

Strictly, if an expense is not incurred wholly and exclusively for the purposes of the rental business, it may not be deducted.

In practice though, some ‘dual purpose’ expenses may include an obvious part which is for the purposes of the business.

Question: If a vehicle has been used by a landlord for non-business travel, has only the business travel been claimed?

I advised my property investor client that if a vehicle is used by a landlord for rental business and non-business travel, the full amount of any running costs, including fuel, and insurance paid by the business or landlord may not be exclusively for the purposes of the rental business.

If the costs are not properly apportioned to reflect the business and non-business elements, the deduction claimed will be inaccurate.

Where the business is administered from an office outside the landlord’s home, non-business travel will normally include journeys between home and office or let property.

I advised my client to ensure that there is an adequate record-keeping system maintained to establish the proportion of business use each year. Apportion any costs to reflect the business and non-business elements, and ensure only the business element is allowed.

Where there are separate business premises away from the landlord’s home there is normally little doubt that the journeys to and from home are, in part, for the private purpose of commuting.

The cost of travel from the rental business premises to and from the rental properties, and between the properties, may be allowable provided it was incurred wholly for business purposes.

In a rental business, where there are often no separate business premises, identifying the purpose of the journeys can be difficult. In these circumstances consideration needs to be given to the nature of the trade, how the business activities are organised, and what purpose the journeys to and from home serve.

The actual costs of any business journeys (such as motorway tolls and parking fees) and a proportion of the road tax, insurance (provided the insurance covers business use), repairs and finance costs, together with the cost of fuel incurred for the journey will generally be allowable.

Ask your property tax accountant for further advice on specific elements if you’re unsure.

Do you have a tax question that you want answering?

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Question: Are all expenses claimed by the landlord for business trips wholly for the purpose of the rental business?

I reminded my landlord client that if a trip either within the UK or abroad is for a mixed purpose the whole expense of the trip may not be allowable.

For example, when the landlord owns a foreign property and the purpose of the trip is for both the rental business and a holiday, then only those items of expenditure that are solely for the purpose of the rental business can be deducted.

If the sole purpose of the trip is for the rental business, the expense will usually be allowable in full notwithstanding any incidental private benefit.

Consider the purpose of the trip. For example, check whether there was any personal travel included within the trip, or if the landlord was accompanied by their spouse, partner and family.

Where the trip was not solely for the purposes of the rental business ensure the appropriate expenses, for example flights, are disallowed.

Querstion: Where wages and salary costs are being claimed, have employment taxes been applied?

I advised my landlord client that operation of tax under PAYE and National Insurance contributions (NICs) can be overlooked where an individual other than the proprietor is employed full-time or part-time, for example, to collect rents, provide office assistance, and gardening.

Where an individual is employed within the rental business, ensure that PAYE and NICs are operated appropriately on any payments made, and that these are remitted to HMRC.

Ensure that no deduction is made in computing the rental profit or loss for any drawings paid to the proprietor or partner, including any payment for time spent managing the property.

Failure to operate PAYE may result in the employer (landlord) having to pay HMRC any tax and NICs that should have been deducted from the employees’ wages.

Sometimes an employee is engaged partly to manage the rental business property and partly on private work or other work outside the rental business.

PAYE and NICs must be operated on the entire remuneration of the employee – but it may be difficult to ascertain the correct amount to be included as a deduction against the rental business profits.

In such circumstances, a ‘fair and reasonable’ split should be made which takes into account all the facts.

Only the part of the wage or salary properly attributable to the rental business duties is allowable as a deduction in computing the rental business profit or loss. Ask your accountant if you’re unsure.

The landlord client commented on how some of the basic questions weren’t even in his original checklist when he started to enter the world of property investment in the UK. My job as a leading property tax expert is to ensure that property investors achieve the maximum financial return on their investments.

The following articles will also be useful as background reading and reference tools for landlords:

Minimise Capital Gains Tax (CGT) when selling property

Why you should consider the Enterprise Investment Scheme

Wealth management and tax planning for property investors

Next week, I’ll be continuing to highlight some of the essential questions to consider if you’re looking to ensure that you’re making money consistently from your property portfolio.

Need accountancy services from a property tax specialist?

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Email: simon@optimiseaccountants.co.uk