Are you aware of the changes on the taxation of rental properties?

BcgArKdc8Do you let out a property?

I come across many clients who need help in dealing with the tax affairs of a property they let out.  Over the past year, taxation in this area has changed considerably, and further changes are planned: Are you aware of everything?

Until next April, the interest paid on any loan against the property is an allowable expense when calculating the taxable rental profits.  But from 2017/18 higher rate taxpayers will start to have this restricted.  Current basic rate tax payers, may also be affected if their rental income pushes them over the higher rate tax bracket.

This restriction is being phased in over four tax years, starting from April 2017.

By 2020 some taxpayers might be liable to pay more in tax than the actual profit from renting out the property!

If you rent out a property with a mortgage on it and you are close to or exceeding the higher rate tax bracket we can prepare estimated calculations to give you an idea of your future tax position.

Is there something you can do to mitigate this increased tax liability?  Can you transfer part of the property to your spouse?   Is it worth setting up your own company to transfer the property to?  We can explore the tax position of potential options for you.

You might decide to sell your property. If you do this you need to consider the capital gain tax (CGT) position.  The CGT rate is currently 18% for basic rate tax payers and 28% for higher rate tax payers. When working out the gain, you need to take into account any reliefs available, particularly if you ever lived in the property. We are happy to help with the calculation to ensure the gain is accurate.

Wear and tear allowance

Since 6th April 2016 the wear and tear allowance has been scrapped by the government. In the past landlords could claim 10% of the rent for their furnished properties and offset this against the rental profits, instead of the cost of replacing furniture and fixtures.

Remortgaging your rental property

If you increase the level of your mortgage to a value greater than the property when you purchased it, you may not be able to claim all interest payable on the mortgage, as an expense against rental income.

You can never claim back any capital repayments on a mortgage against the rental income for a buy-to-let property.

Rent a room relief

Rent-a-room relief has increased to £7,500 from £4,250. This relief is for anyone who rents a room in your only or main residential property.  This includes having a lodger or offering bed and breakfast to paying guests.

Do you need to fill out a tax return?

Has your financial position changed in the past year?  Have you retired, sold an asset or started a new venture.  Are you aware that you may need to let HMRC know that you need to complete a tax return? Do any of the following apply to you since 6 April 2015. Started to rent out […]

VAT schemes

If your VAT taxable turnover goes over £82,000 in any twelve month period you HAVE TO register with HM Revenue & Customs (HMRC) and immediately charge VAT on your sales. You have 30 days to register.

In practical terms, if your turnover is nearing £82,000 you need to check your turnover monthly for the 12 months up to the end of the previous month. If you register late for VAT you must pay what you owe from when you should have registered.

If you’re not sure if you need to register for VAT we can check this for you.

Calculating and dealing with VAT

The amount of VAT a business pays or claims back from HMRC is usually the difference between the VAT charged by the business to customers and the VAT the business pays on their own purchases.

VAT returns are usually prepared every 3 months (a VAT quarter), but HMRC understand that this can be onerous for small business owners and so they came up with a number of schemes to help.

These include:

1) Cash accounting

2) Annual accounting

3) Flat rate scheme.

Cash Accounting

With cash accounting, VAT due on your sales does not have to be accounted for until you have received the cash. If your business struggles with bad debts this scheme could be beneficial for you.

Annual Accounting

This makes accounting for VAT easier, as the return is filed once a year. Payments on account of VAT are paid over the year, with a balancing payment due within two months after the end of the year.

Flat Rate Scheme

Businesses can join the flat rate scheme if their VAT taxable turnover for the next year should be less than £150,000.

The Flat Rate Scheme is great for small businesses as you pay a fixed rate of VAT to HMRC, which makes the accounting and completion of the VAT return much easier.

The VAT flat rate you use depends on your business type. For example Estate Agents pay 12%, Hairdressers and Beauticians 13% and Restaurants 12.5%.

You might save money by joining the Flat Rate Scheme. The VAT you pay under it could be less than the VAT paid calculated normally, particularly if you don’t have many expenses. Small business owners are unaware of this. If you’re worried about VAT or want to discuss if any of the VAT schemes above could be better for you and your business, please contact us.