Ask Simon: your property tax questions answered

Oct 21, 2020

When the UK Landlord Tax team gets together – virtually these days – one of the things we do is compare notes on the questions clients are asking.

It’s a great way of understanding what’s on the minds of property owners in the UK and a way of sharing our knowledge.

Sometimes, if Kevin or I don’t know the answer, we even have to get stuck into the HMRC tax manuals – which, obviously, we secretly love doing.

Here are a few recent questions that struck me as especially interesting, along with the clearest answers I can provide, with input from the team.

The first concerns a favourite subject of mine, allowable expenses.

Q. I’m a tradesman – can I claim for time spent working on a residential property that I own and rent out?

The straightforward answer is no, not in most circumstances.

And even if you did, there’s probably not much benefit in doing so.

First, there’s the principle that while repair work carried out on the property can be claimed, work towards a capital improvement can’t. Capital improvements include things like an extension or upgrade of the kitchen – things that fundamentally increase the value of the property. That means unless the work you’re doing amounts to fixes and tidying up between tenants then you’re already on a non-starter.

But let’s say for example that you’re a plasterer and want to repair damage to the walls caused by an outgoing tenant. In that case, you could do the work, invoice yourself on behalf of your plastering business and then claim the payment as an expense against the property business. But why bother? You’ll have to pay tax on that payment as a component of the income from your plastering business, so there’s no particular advantage.

In addition, you’ll also have to spend time processing paperwork and payments – and remember, nobody’s time is free

If you jointly own one or more properties with a family member, say, it might make sense to formally bill for your time, just to keep things neat and tidy, but, again, there’s no particular tax advantage to doing so. On balance, I think the real saving here is in the fact that you don’t have to pay someone else to do the work or spend time supervising them.

Personally, I’d just be happy with that.

Q: Other than what I make from renting a property, what other income should I declare as a non-resident landlord?

We get lots of different versions of this question from landlords living overseas and renting out property in the UK.

The underlying point is that people aren’t sure whether they’re supposed to declare their total income, including what they earn by working in another country, or just what they earn in the UK.

The answer is relatively easy: if you pay tax on employment income in the country where you live, you don’t need to pay it again in the UK. Therefore, what your UK tax return has to cover is any income you make in the UK.

For the vast majority of the single-property non-resident landlords we work with, that’s fairly simple. They get a job in, say, the Netherlands, but very sensibly keep hold of their flat in Birmingham, for example, and rent it out.

They pay income tax to the Dutch government and declare only the rental income on a separate UK tax return. Job done.

Sometimes, of course, it’s more complicated than that – people sometimes have multiple sources of income in the UK, or where they are resident for tax purposes might be up for debate.

As a rule, the more clarity we have, the more likely it is that we’ll be able to submit an accurate UK tax return on their behalf. Tell us everything and we’ll work it all out so your tax bill is no higher than it needs to be and any queries from HMRC can be anticipated and handled.

One thing that’s worth highlighting is that the very worst thing you can do is fail to submit a tax return to HMRC for your UK rental property property income.

If you let your property through a letting agent and aren’t registered with HMRC, the agent is obliged by law to withhold tax at the equivalent of basic rate from the rent that’s paid. If you’re not using a letting agent, they can write to the tenant directly and ask them to act effectively as a tax collector – potentially very awkward for everyone.

Q: Is it a good idea to go straight to HMRC for tax advice?

You don’t work with HMRC as much as I do without gaining a great deal of respect for what they do, and I’ve always found dealing with them pleasant and professional.

At the same time, there is absolutely no incentive for them to help you identify tax breaks or help you reduce your tax bill – the taxman is not your friend!

That’s especially true if you’ve let your taxes get into a muddle and want to get it squared away.

Let’s face it, it happens sometimes, especially when people move from the comfort and safety of PAYE through their pay packets and into the complex world of self-assessment and multiple income streams.  Sometimes, people just don’t realise they have to pay tax on their new rental income. There might even be a bit of wishful thinking in play.

Whatever the situation, it’s always best to talk it through with an accountant before you go to HMRC. We can quickly come up with a plan of action and a starting point for a negotiation over clearance of unpaid or underpaid taxes. Then, we can take your side in that conversation and help you handle any questions that come your way.

If you’ve got questions about property tax, get in touch today.

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