Becoming a Landlord – We don’t mean this kind of landlord…
Buying and renting out a property and becoming a landlord has been on the increase over the last 10 years in the UK. There are a number of reasons for this, one of which is as an investment or retirement fund. According to HMRC the number of landlords in the UK increased by 7% to reach 1.75 million in 2013-14. We have also seen a rise of Whittaker & Co clients purchasing second and third properties to rent out to tenants.
If you are in a position to buy a second property as an investment, firstly – congratulations! Secondly, have you thought about the tax implications or planned for handling the tax side of things?
Managing a second property can be financially beneficial but it can also be a burden if managed inappropriately. We know many clients past and present that have been able to invest in a second property with the intention of renting it out to a tenant. The majority have been well informed and prepared for any costs that they will incur on the property including potential tax liabilities.
A common mistake with rental properties and dealing with HMRC is the assumption that “I’m not making any money on it so I don’t need to declare it.” However this assumption is not correct.
If you have a property that you rent out to a tenant who isn’t a family member then you have to declare the information to HMRC; EVEN IF YOU ARE NOT MAKING ANY MONEY FROM IT! If your income from property rental is less than £2,500 a year then you must contact HMRC. You must report it on a Self-Assessment tax return if it’s above £2,500.
Usually the biggest expense with a rental property is the mortgage. However, only the interest part of the mortgage payment can be treated as an expense when working out your rental profit or loss for tax purposes. HMRC are phasing out this ruling of being able to use mortgage interest as an expense from April 2017, details of which can be found here https://www.gov.uk/government/news/changes-to-tax-relief-for-residential-landlords
Other allowable expenses that you can use to lower your profits are:
Letting agents fees;
Buildings and Contents Insurance;
Maintenance & Repairs to the property (not improvements though);
Utility bills, like gas, water and electricity;
Rent, ground rent, service charges;
Services you pay for like gardening or cleaning;
Indirect costs of letting the property, like phone calls, stationery and advertising.
The most common statement we hear from our clients is “It’s not making any money” that may be true from your bank managers point of view; however HMRC see things differently. We are not trying to scare you off from this effective investment method; we want to inform our clients of the pitfalls and common mistakes when becoming a landlord.
Picture credit – Pete Dadds/Avalon/PA Wire