By Louise Misiewicz
Do you know how to maximise your rental property income?
What are you doing to protect your UK property business?
I’ve been serialising a phone consultation with a new property investor client, as many of the questions and essential elements raised from that phone call are useful information for any buy-to-let landlords looking to maximise their property investment return. The previous blog articles have been as follows:
In Part Six, I’m this week reviewing some of the further elements raised with my landlord client when we discussed the ways in which he was ensuring that his property rental income was being protected.
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Some of the ways to protect your property rental income includes assessing the following items:
Question: If wages or salaries have been paid to relatives or connected parties, are the amounts paid commensurate with their duties?
I reminded my landlord client that where there is a non-business purpose to wages and salaries paid, for example to relatives or connected parties or where the level of payment is determined by the relationship, then the part or proportion of the payment that is not wholly for the purposes of the rental business is not an allowable deduction.
In addition, if wages or salaries are not paid within nine months of the end of the period of account they should be disallowed.
I recommended that my property investor client should establish whether any wages or salaries were paid to relatives or connected parties, and to confirm the payments were wholly for the purposes of the rental business.
Consider whether the wages or salaries paid to the individual exceed a reasonable level of reward for the value of the work undertaken.
Ensure the overall remuneration package including salary, wages, benefits and pension contributions is taken into account when considering whether the amounts were paid wholly for the purposes of the rental business.
Question: If a property has been let rent-free (or at less than the normal market rate) has any expenditure been restricted accordingly?
I advised my landlord client that unless a normal market rate is charged for a property, it is unlikely that the expenses of the property will be incurred wholly for business purposes – and should normally be excluded or restricted in assessing the rental profit or loss.
If the business lets a property below the market rate as opposed to providing it rent-free, they can deduct the expenses of that property up to the amount of rent received.
As a result, uncommercial lettings should not produce a loss for tax purposes. Any excess expenses cannot be set against profits from another rental property or carried forward to be used in a later year.
Question: If Rent a Room Relief is being claimed, does it meet the conditions for relief?
I told my landlord client over the phone that under the Rent a Room Scheme, a qualifying individual can be exempt from Income Tax on profits from furnished accommodation in their only or main home if the gross receipts (before expenses) are less than the exemption limit.
However, they cannot then claim any of the expenses of the letting.
Unfurnished lettings and rooms let as an office or for other business purposes, for example storage, do not qualify. The scheme does not apply to companies or partnerships. Neither does it apply if the home is converted into separate flats that are then rented out.
Ensure the individual is in receipt of rents from letting furnished residential accommodation in their only or main home and that the gross receipts, before expenses, are below the exemption limit.
Gross receipts include not only rents but also payments made for the provision of any other goods or services (such as meals, cleaning, and laundry) in connection with the letting.
Rent received from letting other properties should be excluded, as I reminded my property investor client.
If the gross receipts are below the exemption limit the individual is automatically exempt from tax. However, it is worth considering if an election should be made to have these rents taxed in the normal way – that is, rents received minus expenses.
This may be beneficial for a particular year where a loss has resulted, which can then be set against other letting income outside Rent a Room.
Rent a Room Relief applies to a tax year and the exemption limit should be halved when someone else received income from letting accommodation in the same property. This might happen, for example, when the property is jointly-owned with another person.
Question: Has any income over the Rent a Room exemption limit been treated as taxable rental income, and the appropriate method applied?
I told my client that the Rent a Room Scheme provides two methods to calculate the taxable profits when gross receipts exceed the exemption limit. If receipts in excess of the exemption limit are overlooked or one of the two methods is not applied the rental profits may be incorrect.
If the gross receipts exceed the exemption limit ensure one of the methods below is used to calculate the profits. Method A will apply automatically unless an election is made to apply method B.
Method A: profits are calculated in the same way as for any property business. Total gross receipts are added together and allowable expenses are deducted appropriately.
Method B: profits are calculated by taking gross receipts and deducting the exemption limit. When this method is used the individual cannot claim any other expenses.
Once method B has been chosen it continues to apply unless the individual informs HMRC, within the time limits, that they would like the first method to apply again.
For example, when the taxable profit for a particular year is less under method A, or where expenses are more than the rents, so there is a loss.
Question: If capital allowances have been claimed, is the expenditure qualifying?
I advised my buy-to-let landlord client that capital allowances may be available on qualifying expenditure incurred on plant and machinery, but this depends on the type of property income.
They are not generally available where the income is from residential property. They may be available in respect of furnished holiday lettings and commercial property. Ask your property tax accountant if you are unsure.
Review the type of property income and ensure that capital allowances are not claimed on plant and machinery in a dwelling house that is used in an ordinary or an overseas property business.
Expenditure incurred on the provision of plant or machinery for use in a dwelling house does not qualify for capital allowances for an ordinary or an overseas property business. Consideration should be given to expenditure on plant and machinery in common parts of a building (for example, the stairs and lifts) which contains two or more dwelling houses. This may qualify for capital allowances.
Expenditure on plant and machinery for use in properties that are not dwelling houses (for example, commercial properties) may qualify for plant and machinery allowances.
Expenditure on plant and machinery may also be claimed where the property is a furnished holiday let.
When the purchaser of a property claims capital allowances on the fixtures acquired with the property, it is important they establish the capital allowances position of the vendor as this will have a bearing on the allowances the buyer can claim.
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Question: Has the 5 April basis period been applied?
During the phone consultation, I told my property investor client that for Income Tax purposes, a rental business basis period is to 5 April each year.
If the accounts are not drawn up to 5 April, then the two sets of accounts drawn up to some other accounting date should be apportioned to establish the profit or loss for the year ended 5 April.
If accounts have not been drawn up to 5 April, ensure profits or losses for the two years are apportioned on a daily basis to find the profit or loss for the relevant tax year.
The charge for Income Tax is on the full amounts of the profits arising in the tax year. This means that a return has to be made to show the income of the year ended 5 April.
The two allowable exceptions are:
i. where the property income belongs to a partnership carrying on a trade or profession.
ii. where the income is actually trading income (and not property income as defined for tax purposes) because the letting activity amounts to a trade.
Question: Have any rental business losses been used correctly and set in full against the first available rental profits?
I reminded my property investor client that where rental losses are carried forward they must be used in full against the first available rental business profits.
There is no provision that allows for a smaller amount to be relieved. Losses made in one rental business cannot be set against any other rental business that is carried on at the same time in a different legal capacity.
For this purpose, the following are separate rental businesses, and losses in one cannot be set against the profits of the others for these commercial entities:
- UK furnished holiday lettings business.
- Property business consisting of properties that do not qualify as furnished holiday lettings.
I told my client to ensure that the correct loss figure is bought forward, and fully utilised against the first available rental business profits, keeping UK furnished holiday lettings businesses separate.
Where rental businesses are carried on at the same time in different legal capacities ensure that losses made in one rental business are not set against any other rental business.
Losses arising from a rental business can be set against other non-rental income in limited circumstances. Rental business losses are calculated in the same way as rental business profits.
So long as the property business continues, losses should be carried forward and deducted from the future profits from the same property rental business, until the losses can be utilised in full.
Expenses incurred on properties let free or below market rate can only be deducted up to the amount of rent received. The excess of the expenses over the receipts cannot be deducted in the rental business and cannot, therefore, create a loss.
I advised my client that losses cannot be created under the Rent a Room Scheme.
So, if the gross rental income is under the exemption limit or the excess income is being taxed under the alternative basis, any actual loss made cannot be relieved unless the individual notifies HMRC within the time limit that rent a room should not apply for that particular tax year.
One of the most rewarding ways in which me and my team of property tax specialists help our landlord clients is by saving them money whilst also increasing their financial return on their investments.
Next week, I’ll review further elements for property investors to incorporate into their property portfolios.
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