By Louise Misiewicz
How can you protect income in your property business?
Are you using a checklist for all property rental income?
I was reviewing a client call recently, and the details that came as a result of the consultation with the new buy-to-let landlord were so useful, that it has now formed a serialisation of blog posts here for readers too.
In Part Three this week, I’ll be focusing on an area to think about carefully as a property investor – a checklist for property rental income, to ensure that your portfolio is as profitable as possible.
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These are the initial questions I reviewed with my property landlord client on our consultation call, and it’s worth making a note of them to use as a reference tool for a risk assessment of your own property portfolio.
The first area I want to consider is that of property income receipts – and these following questions:
Question: Have all gross rents and receipts from land and property been included as property income?
Land and property income includes all gross rents received before any deductions, for example property management fees. Income also includes other receipts such as grants and ground rents.
I advised my property investor client to ensure that all property income is identified, and to include all rents gross of any fees or expenses paid. Identify any ancillary receipts and ensure these are also included as property income.
Where a property management agent is engaged they often pay the landlord the rents received net of their fees and other expenses including items that may be capital or otherwise not allowable to be offset against your rental income. The gross rents and not the net amount that was paid to the landlord must be included as the property income. Any agent fees and other costs, if allowable, should be claimed as a deduction.
Question: Have any deposits received been included as income?
I told my buy-to-let client that deposits taken from tenants should be recognised in accordance with generally accepted accounting practice, normally by being deferred and matched with the costs of providing the services or carrying out repairs. deposits are not rental income, and are held separately.
Deposits not refunded at the end of a tenancy or amounts claimed against bonds should normally be included as income unless they have already been recognised.
I also advised him that any deposit balance not used to cover the cost of services or repairs and that is repaid to the tenant or licensee should be excluded from the receipts of the rental business.
Question: If a jointly-owned property is let, has the profit or loss been divided correctly?
Where two or more individuals jointly own a property any profit or loss is normally divided between them according to their share of the property being let unless a different division is agreed. The share for tax purposes must be the same as the share actually agreed, as I told my client over the phone.
Where the joint owners are married or in civil partnership, the profits or losses should be split 50/50 unless they own the property in unequal shares and they make an election to have their share match the share they each hold. We wrote an article previously about using deed of trust to minimise income tax
I told him that it is important to establish if rents have been received from a jointly let property. Ensure that the share of the profit or loss shown on the tax return is divided between the owners according to their share of the property unless a different division has been agreed between them.
Where the individuals are married or in a civil partnership ensure the profit or loss is split 50/50 unless an election is made for their share to match the share of the property they each own or the property is a furnished holiday let. If you wanted to read more about holiday lets please see our separate article
Question: If there are overseas rental properties, have the profits or losses been treated correctly as income of an overseas property business?
I advised my investor client that profits or losses of an overseas rental property should not be combined with those of a UK rental business.
If profits or losses of the UK and overseas rental businesses are combined this may result in profits or losses being calculated incorrectly, for example if the losses from one are set against profits of the other.
I advised him to ensure that all income and expenses declared on the UK property pages of the return relate to UK properties and that any income and expenses relating to overseas property are declared separately.
Rents and other receipts from properties outside of the UK are taxed separately as foreign income, even though the profits and losses are computed using trading principles just like those of a UK rental business.
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Question: If there is commercial letting of furnished holiday accommodation in the UK, have all qualifying conditions been met?
I made my client aware of the fact that there are special tax rules allow the commercial letting of furnished holiday accommodation in the UK to be treated as a trade for some specified purposes – more beneficial capital allowances and certain capital gains reliefs., which you can read more details here
Furnished holiday lettings are charged under the property income rules although there are some tax advantages available for furnished holiday lettings if specific qualifying conditions are met. For example, capital allowances can be claimed on furniture and furnishings in the property as well as plant and machinery.
The letting should not be regarded as a furnished holiday letting unless all qualifying conditions are met.
Ensure that the property is situated in the UK, furnished, let on a commercial basis, with a view to a profit, and that all qualifying conditions are met.
I advised my investor client that all of the following qualifying conditions must be met:
Availability: the property must be available for commercial letting as holiday accommodation to the public for at least 210 days during the relevant 12-month period.
Letting: the property must be commercially let as holiday accommodation to members of the public for at least 105 days during the relevant 12-month period.
Pattern of occupation: not more than 155 days must fall during periods of longer-term occupation.
I also told my client that profits or losses arising from furnished holiday letting businesses should be calculated separately from any other rental business profits and losses.
Where furnished holiday lettings result in a loss, these losses can only be carried forward and set against the furnished holiday letting profits of the same furnished holiday letting business.
Getting these checklist questions in order will help to maximise your property rental income in the UK.
Next week, I’ll be continuing my review of financial risk areas to consider within property rental incomes.
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