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How to protect property rental income – Part Seven

September 24, 2017

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

By Louise Misiewicz

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The recent serialisation is continuing this week, and I’m up to the final Part Seven. The previous Parts to this article series can be read 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.

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

Part Five of the blog serialisation can be reviewed here – capital repayments and dual purpose expenses.

Last week’s Part Six of the article series can be seen in full here – dealing with wages and rent-free lets.

In Part Seven, I’m going to look at some of the further questions I asked my property investor client to think about in terms of maximising the return on investment from his property portfolio in the UK.

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The additional areas of consideration for my property investor client covered the following questions:

Question: Have only appropriate rental business losses been set against general income?

I advised my property investor client that property rental business losses should normally be carried forward and deducted from future profits of the same rental business.

Losses from properties that are not qualifying furnished holiday lettings can be set against general income but only in limited circumstances, when they are attributable to capital allowances or agricultural expenses.

In addition, the loss relief is restricted to the lesser of these three factors:

the total general income for the year after deducting rental business losses brought forward (to the extent of the rental business income) and after deducting any sideways relief for the previous year’s loss

the amount of the rental business loss made in the year

the net capital allowances after setting off any balancing charge

Additionally, there is a further limit on the amount of income tax relief that an individual may claim for deduction from their total income in a tax year. The limit in each tax year is the greater of £50,000 or 25% of the individual’s adjusted total income.

Where property rental business losses are to be set against general income, ensure that these are limited as detailed above and restricted appropriately. Ensure a claim is submitted within the appropriate time limit.

I reminded my landlord client that the amount of the loss attributable to the items detailed above can be set against the general income of the year of loss or the following year.

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Question: If a landlord is non-resident, has tax been deducted from the rental payments?

I told my property investor client that where the owner of a property lives outside the UK for more than six months, their letting agent or tenant should normally deduct basic rate Income Tax from the rental paid to the non-resident landlord, unless the letting agent or tenant has received confirmation from HMRC that the non-resident landlord is approved to receive their rental income gross.

Establish whether any rents are being paid to or received by a non-resident landlord. If so, ensure the landlord receives a certificate showing the tax deducted by the letting agent or the tenant.

For letting agents or tenants unless either of the exceptions apply, ensure that basic rate Income Tax has been deducted and paid to HMRC, and a certificate of tax deducted is provided to the landlord by 5 July following the end of the year to 31 March.

The Non-Resident Landlords Scheme is a scheme for collecting tax from the UK rental income of persons whose usual place of abode is outside the UK.

I reminded my client that the only exceptions are for:

  • a tenant making payments direct to an overseas landlord, where the rental payments are £100 a week or less and the tenant has not been instructed by HMRC to deduct tax. There is no such limit for letting agents, who are required to deduct tax from all rents collected on behalf of non-resident landlords unless the second exception applies
  • a letting agent or tenant holding confirmation from HMRC confirming that the non-resident landlord has HMRC’s approval for rents to be received gross

Question: If there has been a disposal of a rental property, has CGT been calculated appropriately?

I advised my property investment client that where a let property has been disposed of, Capital Gains Tax (CGT) can be overlooked. Identify any let properties disposed of and ensure that CGT is calculated and reported on the Capital Gains Tax pages of the self assessment tax return.

Ensure previous documentation relating to the purchase of the property and any capital expenditure are retained. This will ensure that the correct expenditure and reliefs are claimed in the CGT computation. I told my landlord client that CGT is a tax on the profit or gain made on sale or where someone otherwise ‘disposes of’ an asset. This includes the gift of an asset.

Most real property, such as land and buildings, is liable to CGT, which means a capital gains computation is required to work out any gain or loss.

Types of property liable to CGT include:

  • a rented property or a second home
  • business premises, such as a shop or a farm 
land, such as agricultural land

These points raised and discussed have been helping my buy-to-let property client to ensure that his checklists and financial reviews of his property investment portfolio are focused in the right areas.

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Email: simon@optimiseaccountants.co.uk