Using HMRC’s property rental toolkit to avoid common errors

 

Mistakes in completing self-assessment returns can prove costly. There is the risk that more tax will be paid than is necessary. If tax is understated and HMRC judges that reasonable care has not been taken, there is also the possibility of penalties. However, in seeking to avoid common errors there is help at hand in the form of HMRC’s toolkits. 

 

Toolkits are designed to help agents ensure that client returns are complete and correct. Each toolkit focuses on a particular area and draws attention to common errors which have come to HMRC’s attention. The toolkits each contain:

• a checklist to identify key errors that often occur; 
• explanatory notes which identify underlying types of error, explain how to avoid them, and provide a brief outline of the tax treatment; and
• links to relevant guidance, generally in the HMRC guidance manuals. 

The toolkits are updated each year to reflect changes in the relevant Finance Act.

 

Although the toolkits are designed with agents in mind, their use is not limited to agents. They are a useful resource for anyone completing a tax return.

 

A person who owns a property or land and who receives income from that asset will generally be carrying on a property rental business, the profits of which are taxed. Where that person is an individual, the profits and losses from the property rental business need to be returned on the property pages of the self-assessment return. 

 

The property rental toolkit provides an awareness of common errors, allowing action to be taken to avoid them. 

 

The first risk area highlighted in the toolkit is that of record keeping. Without complete and accurate records, it is impossible to accurately compute profit; the calculation of profits relies on knowing the income from the property and also the allowable expenses. 

 

Failure to keep proper records may mean that:

• receipts other than rental income are overlooked;
• expenditure or relief are claimed incorrectly or overlooked; or
• property disposals are overlooked.

Guidance on record keeping can be found on the Gov.uk website at: www.gov.uk/keeping-your-pay-tax-records.

 

Property income receipts

All income (with the exception of capital receipts) should be taken into account in computing the profits of the property rental business. 

 

Receipts that are not rent but nevertheless represent income of the property rental business are commonly overlooked. It should also be remembered that property income can include payments in kind as well as cash receipts. This situation may arise if the landlord and tenant agree (say) that the tenant will decorate the property in lieu of one month’s rent. Income from casual or one-off letting (e.g. letting a field out for parking during a village show) will also constitute income from a property rental business. However, if this is the only income it may well fall within the property income allowance of £1,000, with the result that it does not need to be reported to HMRC.

 

Some types of lettings need to be considered separately. This includes profits and losses from overseas properties (which form a separate overseas property rental business) and also that from furnished holiday lettings. Properties which are let out rent-free or at below market rent should also be considered separately to ensure expenses are restricted appropriately. 

 

To avoid mistakes when computing the income from the property rental business, the following questions should be considered:

1. Have all gross rents and other receipts from land and property been included as property income as appropriate?
2. Have any deposits received been included as income as appropriate?
3. If a jointly-owned property is let, has the profit or loss been divided up correctly?
4. If there are overseas rental properties, have the profits or losses been treated correctly as income of an overseas property business?
5. If there is commercial letting of furnished holiday accommodation in the UK or the EEA, have all the qualifying conditions been met?
6. If surplus business premises have been let and the rent receivable treated as income of the business, have the associated conditions been met?

Deductions and expenses pose a significant risk area. There is the risk that the landlord will not claim a deduction for all allowable expenses, with the result that more tax will be paid than is necessary. On the other side of the coin is the risk that the landlord will claim a deduction for items which are not allowable, understating profits and running the risk of a penalty.

 

Expenses are only deductible if they are incurred wholly and exclusively for the purposes of the business. Subject to the deductions for capital expenses permitted under the cash basis capital expenditure rules, they must be revenue rather than capital in nature. Distinguishing between capital and revenue expenditure is not always straightforward, and risks may arise.

 

Risks also arise where the expense has a dual purpose and is partly private in nature and partly business in nature. A deduction for the business proportion is permitted where this can be separately identified and meets the wholly and exclusively test.

 

Changes to the treatment of finance costs are being phased in with the method of relief switching from relief by deduction to relief as a basic rate tax reduction. Care should be taken to ensure that the split is correct for the tax year in question. Guidance on the rules can be found in HMRC’s Property Income manual at PIM2054.

 

The following questions should be considered in relation to deductions and expenses:

1. Have all items of expenditure on the improvement of an asset been treated correctly?
2. Have any legal and other professional fees incurred in acquiring an asset been allocated appropriately?
3. Has all expenditure on essential repairs to a newly-acquired property been treated correctly?
4. If expenditure is incurred prior to the commencement of the property rental business has been claimed, have all of the conditions been met?
5. Have capital repayments been excluded from loan interest and finance charges?
6. Has the finance costs restriction been applied to mortgage interest and other finance costs incurred?
7. Have any dual purpose expenses been apportioned in respect of any property used only partly for rental business?
8. If a vehicle has been used by a landlord for non-business travel, including home to work, has only the business travel been claimed?
9. Are all expenses claimed by the landlord for business trips wholly and exclusively for the purpose of the property rental business?
10. Where wages and salary costs are being claimed, have employment taxes been applied appropriately?
11. If there have been wages or salaries paid to relatives or connected parties, are the amounts commensurate with their duties?
12. If a property has been let rent-free or at less than the normal market rate, has any expenditure been restricted accordingly?

Overlooking reliefs and allowances can prove costly for the landlord. Reliefs that may be in point include: 

• rent-a-room relief where a furnished room is let in the landlord’s home;
• the property allowance of £1,000, which can be deducted in place of actual expenses; 
• replacement of domestic items relief;
• capital allowances on certain items owned by the landlord, such as tools, ladders, and motor vehicles, which are used in the property business; and
• mileage allowances in place of the actual costs of using a vehicle.

Care should be taken when claiming reliefs that all the associated conditions are met. 

 

Rental losses from a property rental business can only be carried forward and set against future profits of the same property rental business. 

 

Likewise, losses arising on furnished holiday lettings can be carried forward and set against profits of the same business. Losses from one rental business cannot be utilised by another property business operated by the landlord at the same time in a different capacity.

 

Care should be taken that losses are computed and utilised correctly.

 

Landlords living abroad should be aware of the rules under the non-resident landlord scheme.

 

Use the checklist within the property rental toolkit to help avoid falling foul of commons errors. Keeping a copy of the completed checklist will help demonstrate to HMRC that reasonable care was taken, should the need arise.