It’s coming to that time of year that many of you dread! Tax can be a complex issue, with complicated guidelines and can cause many a headache. Particularly if you are a first time landlord it can help to do the research and feel prepared for the end of the tax year in advance, rather potentially face a penalty.
Types of tax you may face as a Landlord:
1. Stamp duty
When owning a buy to let the stamp duty land tax rates differ depending on whether or not you own a second home, which you live in. Which have quite a recent and detailed article on what you will be required to pay.
2. National insurance
If your rental profits are more than £5965, being a landlord is your main occupation, or you are a multi landlord you may need to pay class 2 contributions.
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3. Income tax
This is the tax most relevant to your annual self-assessment. When you become a landlord you must advise the HMRC because any profits that you earn from rental income is taxed along with any other earnings from employment. The amount of tax will depend on your total income and therefore tax rate banding.
Most people will choose to do their return online here, the deadline for this is usually January of the following tax year, whereas if you wish to submit a paper self-assessment, then you have to send it by the previous October.
What should I do first?
Why not start by setting up a separate bank account for your property accounts? There are two good reasons for this: firstly as a landlord you should never presume that rental monies will be prompt and forthcoming. So be prepared to have a plan in place if there are rent arrears. Secondly, if you have a clean bank statement without your personal transactions, it will be more straightforward to work out your property finances. I think it is sensible not to mix business and personal money.
How to calculate rental profit
To calculate the profit you will need to work out your total rental income and deduct any allowable or ‘revenue’ expenses. For those not a whiz with numbers may choose to use a property management and accounts system for this such as Rentr. Revenue expenses are those which relate to any day-to-day running of the properties and you could think of it as a necessary expense to maintain the property at its current rental and with a tenant in place.
These expenses which can be offset against the tax contribution are:
– Interest payments on your mortgage
– Agent fees
– Accountant fees
– Ground rent and service charges
– Rates and council tax
– Legitimate travel costs
– Phone calls, stationery or advertising
Capital expenses, those which may add value to the property, or some capital gain, cannot be offset against the tax liability, such as: mortgage re-payments and refurbishments beyond wear and tear.
Wear and Tear / replacement of domestic items allowance
The 10% wear and tear allowance is no longer available after tax year 2016-2017. Instead you now can claim relief for replacement of domestic items. Under these new rules, the property does not need to be furnished, but can be part furnished or unfurnished. The new item must replace an old item and be solely for the tenants’ use.
Managing your rental accounts
Are you someone drowning in piles of paperwork or have you always used your trusty spreadsheet for your accounts?
Whether managing the rental and maintenance yourself or choosing an agent for your property management, consider whether you will need any assistance or advice in the future either with organising your paperwork, or specific accounting issues.
When you have multiple properties the old methods may seem to become more tricky. Rentr the smart web and mobile app software for landlords makes it easy for you to manage your rent accounts. Using Rentr, you can view your accounts, filter by property, view any arrears, record payments…. And much more. NOW we also create for you your annual statement, summarising your accounts and deductible expenditure for you. Why do it yourself, when its done for you?
We are not financial advisers here at Rentr, but with years of lettings experience, any questions not covered here please email firstname.lastname@example.org or call 01926 343999
Click here for more information about the Rentr DIY App and service.