Income from land and property is taxable and landlords must pay tax on the profits of a property rental business. In order to calculate the tax liability correctly, and to avoid problems with the taxman, full and accurate records need to be kept.
For UK tax purposes, all let properties in the UK owned by the same person in the same legal capacity are treated as part of the same property rental business. Tax for that business is computed on a global basis on any overall profit after taking account of the income and expenses arising in respect of all properties comprising that business.
In order to compute the profit or loss for the property rental business, it is necessary to know details of the income and expenditure in relation to each property. It is therefore important that the landlord maintains sufficient records to enable the profits and losses to be calculated for the property rental business.
In working out the profits or losses of the property rental business, the starting point is arguably the rent received from letting the properties. The landlord will therefore need to keep records of rental income, together with supporting invoices, receipts or rental statements.
In the event that the property is let furnished, any separate sums received in respect of the use of the furniture must also be taken into account as rental receipts. Consequently, the landlord will need to keep a record of these, again supported by the invoices, receipts or rental statements.
The landlord may receive income from other sources that needs to be taken into account in working out the profit or loss of the property rental business.
This may include service charges in respect of the use of particular services or utilities, ground rents, maintenance charges and suchlike. As with rental income, the landlord must keep a record of any income of this nature, together with associated invoices, receipts or rental statements.
In the event that the landlord receives any other income from the property, such as income from sporting rights, any fee received for the use of the property, such as from a film crew using the property for a location shot, insurance pay-outs (e.g. from a policy that covers non-payment of rent), grants from local authorities, lease premiums etc., the landlord must keep a record of these too, once again with supporting documentation.
For each item, the landlord should record the date of the receipt, a description of the payment, the name of the person from whom it was received and the amount. Where the landlord is VAT-registered, the VAT element, where relevant, should also be recorded. Supporting invoices and other documentation should be filed so that they can be located easily in the event of any query by the taxman.
No one likes paying tax. To make sure that landlords do not pay more tax than they need to, it is important that they keep detailed records of expenses incurred in relation to the property income business, together with supporting receipts so that full relief can be given for allowable expenses.
It should be noted it is only revenue items that can be deducted in computing profits. Therefore the landlord will need to ensure that his records are able to distinguish correctly between revenue and capital items so that they can be treated in the correct manner.
Expenses which can be deducted in computing profits of the property rental business include:
- letting agent’s fees;
- accountant’s fees;
- legal fees;
- building and contents insurance;
- repairs and maintenance;
- council tax;
- cleaning costs;
- mortgage interest;
- gardening costs;
- costs of advertising for tenants;
- utility bills, e.g. gas, electricity and water where the costs are met by the landlord;
- cost of gas safety or energy efficiency certificates; and
- any other costs of letting the property, such as phone calls, postage, stationery etc.
Again, the landlord should keep a record of the date on which the expense was incurred, the supplier, a description of the expense, the amount and any VAT element. In each case, supporting receipts or statements should be kept and filed such that they can be easily located.
It is important to note that expenses can only be deducted to the extent that they relate to the let property. If an expense covers a whole building, say, and only part of the building is let (as may be the case in relation to buildings insurance cover for example), the expense must be apportioned between the let and unlet parts and a deduction claimed only in relation to the let element. The same is true where there is both personal and business use, for example, if the same cleaner is employed to clean the landlord’s home and also the let properties, again the expense must be apportioned and only the part relating to the let property deducted.
Where expenses are apportioned, the landlord should keep details of the basis of apportionment, together with any substantiating evidence.
As noted above, capital and revenue items are treated differently for tax purposes and it is important that the landlord’s records are sufficient to distinguish between the two.
Where plant and machinery capital allowances are available, the landlord must keep records of the date on which the item was bought and its cost.
Where the annual investment allowance was claimed, the landlord must keep a record of that. If the annual investment allowance was not claimed or the allowance had already been used, the landlord must keep a record of writing allowances claimed each year and the tax written down value carried forward.
Under the property rental business rules, the profit or loss of the business is computed by reference to all properties in that business. This means that where expenses in relation to one property exceed income from that property, relief is automatically given against the income of another property in the portfolio. However, where the overall result is a loss, the loss can only be utilised against future profits of the same property rental business.
Where losses have been made the landlord must keep a record of those losses so that the correct amount is carried forward and relief given for those losses at the earliest opportunity.
The landlord should keep all bank statements relating the property rental business. Where money is received or spent in cash, a cash control account should be maintained so all cash sums can be accounted for and verified.
Any profit arising on the sale of a let property may give rise to a capital gains tax liability. The landlord will need to keep details of the date of acquisition, the cost of the property and incidental costs of acquisition, details of any subsequent improvements of a capital nature, the date of disposal and the disposal proceeds, and details of any incidental costs of disposal, such as legal or estate agents fees.
Where the property has previously been the landlord’s main residence, details of the periods where the landlord lived in the property as his main home and details of when the property was let are also required to ensure that main residence and letting relief can be given where due.
As long as the tax return is filed by 31 January after the end of the tax year to which they relate, records need only be maintained until the following 31 January (i.e. 22 months from the end of the tax year to which they relate). If the return is filed late, they must be kept for 15 months after the date on which the return is filed. However, space permitting, landlords may wish to keep them for longer.
Records can be kept in the way that best suits the landlord, whether this is manually, using spreadsheets or taking advantage of one of the software packages on the market, for example ‘Landlords Property Manager’.
What is important is that the landlord has sufficient records to prepare his accounts, together with the supporting documentation.
By Sarah Bradford