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Landlords' Self-assessment Tax Returns: Advice

December 24, 2020

It might be Christmas Eve, but that doesn't change the deadline to complete your tax returns. If you have income from a rental property, you’re liable to pay self-assessment income tax —and on 31st January 2021 you need to have filed your annual tax return with HMRC and made the main payments for the year.

Registering for self-assessment

All landlords must register with HMRC. If you started your business before 5th April 2020, you should have registered by 5th October 2020. If you haven’t already registered, you may be liable to a penalty.

If you started your business after 5th April 2020, you must register by 5th October 2021 at the latest.HMRC will then create your account and provide your Unique Taxpayer Reference (UTR) number.

Your accounting period runs for 12 months from the day you begin trading. So, if you start your business on 1st June, your accounting period will end on 31st May. You record all your income during the accounting period and all the allowable expenditure incurred for the business.

Record keeping

You must keep accurate records of the rent you receive and your allowable expenses to work out your profit for tax.

These include:

  • Rent books
  • Receipts
  • Invoices
  • Bank statements
  • Mileage logs of property related travel

Allowable expenses

To work out your profit, you can deduct expenses from your rental income.

Allowable expenses include:

  • Interest on a mortgage to buy a residential let property
  • Maintenance and repairs to the property (but not improvements)
  • Water rates, council tax, gas and electricityInsurance, such as landlords’ policies for buildings, contents and public liability
  • Costs of services, including the wages of gardeners and cleaners
  • Letting agent fees and management fees
  • Legal fees for lets of a year or less, or for renewing a lease for less than 50 years
  • Accountant’s fees
  • Direct costs such as phone calls, stationery and advertising for new tenants
  • Vehicle running costs related to your rental business

You may be able to claim a deduction for the cost of replacing domestic items such as:

  • Movable furniture such as beds or wardrobes
  • Furnishings including curtains, carpets and floor coverings
  • Appliances such as televisions, fridges or freezers
  • Kitchenware such as dishes, cooking utensils and cutlery

Capital expenditure

Allowable expenses do not include capital expenditure, such as buying a property or making substantial improvements, such as adding an extension, installing central heating if there was none before or installing a higher-specification kitchen.

If you carry out work on a property before renting it, the costs will also be treated as capital expenditure and therefore not allowable.However, you should keep records of capital expenditure as you may be able to set the costs against Capital Gains Tax if you later sell the rental property.

Filing a tax return

When your business is up and running, you will have to file an annual self-assessment tax return – paper returns are due by 1st October and online filing by 31st January latest every year.

To complete the self-assessment form, you provide details of your business, income and expenditure relating to the rental business and any income from other sources, such as interest, benefits or capital gains.

The income and expenditure figures you provide relate to your earnings as a landlord during the tax year that ends on 5th April each year. So, by 31st January 2021, the figures you file cover the period ending 5th April 2020.

If you started your business after 6th April 2020, your tax return will be due by 31st January 2022 and will include earnings between 6th April 2020 and 5th April 2021.

Working out your payments

The payments you make are based on your profits, not your income from your rental business. In this simplified example, assume you have made a profit of £26,000 from a rental income of £85,000.

You then deduct your personal allowance, which is £12,500 for the 2020-21 tax year, and pay tax on the balance of your profit - £13,500 in this example.

The amount of tax you pay depends on your tax band. In this example, £13,500 would be taxed at the basic rate of 20 percent for taxable income between £12,501 and £50,000. Above £50,001 you would pay tax at the higher rate of 40 percent on the amount above £50,000. You may also have to pay Class 2 and Class 4 National Insurance contributions.

Class 2 contributions apply if your profits are over £6475 for the 2020/21 tax year. You will have to pay £3.05 a week or £158.60 for the year. The additional Class 4 contributions are due if your profits are over £9500 for the 2020/21 tax year.

You will have to pay 9 percent of profits between £9500 and £50,000, and 2 percent on profits above £50,000.

Paying your tax bill

By 31st January each year, you must pay any tax due on the profits calculated in your return. In the example, you would have to pay tax on your profit of £13,500, together with any National Insurance contributions.

You also make a first payment on account for the tax bill due the following January – 31st January 2022. In the example, you would pay 50 percent of the tax and National Insurance contributions due on £13,500 and the remaining 50 percent by 31st July.

Depending on your personal circumstances, you may be able to arrange to pay by instalments, rather than making single lump sum payments. Either way, it is important to pay by the deadlines or the instalment dates. If you don’t, you will have to pay interest on any late amount.

Payment arrangements during the pandemic

If you lost income because tenants were unable to maintain rent payments, you may be able to get government support as a self-employed person.The Self-Employment Income Support Scheme provided grants to cover loss of profits. This counts as income for the period and you must include it in your tax return due by 31st January 2022.

The first payment extension allowed people to defer the 31st July 2020 payment on account until 31st January 2021. A second extension, announced in September 2020, allowed anyone not able to meet their 31st January commitments because of pandemic–related problems to arrange a 12-month payment plan.

This second extension would cover payments due for the deferred July 2020 payment on account, the tax due on profits on 31st January 2021 and the two payments on account due 31st January 2021 and 31st July 2021. The payment plan is available to self-employed people, including landlords, with tax liabilities up to £30,000.

Portico can help with your accountancy needs

Self-assessment tax can be complex, particularly if you have recently started a new business or have encountered problems during the pandemic. If you need professional advice or assistance with completing your tax return, Portico’s accountants can help.

Get in touch with us on 020 7099 4000.

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