There are many reasons why all sectors of the property industry ‒ including developers, housing associations, letting agents, surveyors, architects, and all the associated trades, and individuals too, such as buy-to-let landlords ‒ should hire a specialist property accountant. These individuals, companies, and organisations with property interests are advised to seek specialist accountancy services to make the most of their investment and to protect themselves against non-compliance in a very complex, punitive, UK tax system.
This is true whether you let out one or several properties or, maybe, you develop property for rental, you might be an architect or employ one, be a designer or hire one; you could be a surveyor working with developers, or even a CIS contractor, you might even work in the trades involved with the construction industry. Whichever, whether buying, renting, investing in, constructing, designing, or supplying materials to the construction industry, remember that the tax is complex, the pitfalls numerous, and the benefits to be had considerable, but only if you have experts behind your decisions.
An accountant specialist in property will have a wide-ranging knowledge of property tax law and know about all the changes, of which there have been many across the board. Let’s look at just one area.
A buy-to-let (BTL) landlord may have one or a number of properties bringing in income and generating expenses; they may also develop properties, may be considering adding to their portfolio, or possibly selling a property to release the equity. The taxes and duties, expenses and the tax on profits are a rather fine balancing act of figures, and none of this is straightforward unless you know all the rules.
It isn’t all negative: apart from the pitfalls to avoid, there are also the real gains to be made from careful tax planning. You will need expert advice, not only in order to stay compliant, but also to minimise how much tax you pay.
Recent changes to the rules on income tax relief for mortgage interest costs incurred by BTL landlords of residential properties, being phased in from April 2017, mean that income tax relief will start to be restricted to the basic rate of tax. Phased in over four years, and fully in place by 2020/21, in the first year, the restriction applies to 25% of the interest, then 50% the year after, and 75% in the third year. The changes mean you will have to pay more tax than you did before the new rules kicked in, and not only that, the Interest relief is given only after the tax liability on the income has been computed.
Also note that if the gross annual income from your property letting is under £15,000 you can include the total expenses on your tax return; if £15,000 and over then you must provide a breakdown of all the expenses.
With expenses, you must remember that allowable expenses can only be deducted providing they are incurred “wholly and exclusively” in connection with the letting:
Allowable expenses include: letting agent fees, legal fees for lets of a year or less or for renewing the lease for less than fifty years, accountant’s fees, building and contents insurance, maintenance and repairs (not improvements), gardening, other services, etc. See the full list here.
Non-allowable expenses, apportioned expenses
Some costs of letting are not allowable: e.g. you cannot claim any “capital” costs such as expenses involved in purchasing the property, furnishings for the property, and any improvements you make to the property prior to letting it, but you can claim for “repairs”.
Sometimes work has a combined capital and repair element, in which case it may be necessary to apportion these amounts.
Depending on the type of letting, you can claim a “capital allowance”. In the case of UK and overseas furnished lettings you could claim a 10% (of the net rent) “wear and tear” allowance on furnishings and equipment. But, then you should consider whether the alternative to the wear and tear allowance, the “renewals” allowance, would be better to cover the cost of replacement furniture or equipment and even small items like cutlery.
But be warned, once one of these two options is chosen you cannot then switch back. You must make a decision about which is the most advantageous according to your own circumstances first and then stick to it.
It is better to keep your accounts for property income and expenditure separate, mixing up property income with income from other sources is not advisable.
BTL landlords should already have sought expert advice and be planning for the changes to mortgage tax relief NOW; other changes to taxation are bound to affect how you plan, and so you can see the layers of complexity. Are you already planning for the changes, and are you aware of all of the rules?
Overseas UK BTL landlords
Now let’s look briefly at the situation with non-resident BTL landlords, that is, anyone who owns UK property that they let out but who lives overseas for more than six months in any tax year. The rules around this have changed recently as well to match the rules of UK-resident landlords. Now all non-resident landlords are required to complete a UK tax return to calculate the tax liability and account for tax deducted at source.
If you fall into this category, your tenants or your letting agent will need to operate the non-resident landlord (NRL) scheme. This means that the letting agent needs to deduct basic-rate tax from the rental income before they pass it on to you (which you can set off against your own UK tax bill, if you have one, at the end of the year). For non-resident landlords that don’t have a UK letting agent acting for them, and if the rent is more than £100 a week, their tenants must deduct the tax before they pay the rent.
Then again, a non-resident UK landlord can apply to receive rents without deduction of tax at source. This process, known as the non-resident landlord scheme can be advantageous, but it needs working out by a specialist accountant.
You see, in this small area of property accountancy alone there are many, many issues to consider before you have peace of mind that you are meeting all the tax obligations and making the most from your investment. Whichever area of property accounting affects you ‒ you can surely see why you should use a specialist property accountant.