Self-assessment tax guide for landlords

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The Basics

If you are in receipt of rental income, you must consider your tax implications, and ascertain the correct approach as to how and if this needs to be reported. In a lot of cases, it will mean you need to submit a self-assessment tax return.

So what is a self assessment tax return?

In a nutshell, it is a form which is submitted to H M Revenue and Customs (either on paper or online), and reports your taxable income so as to ascertain whether you have paid sufficient tax throughout the year, or if you have paid too much. Not just those who receive income from an investment property may be required to submit a tax return; there can be other individuals with this same requirement, such as if you are self employed or a Minister of Religion.

Unfortunately, with the UK tax system, there are a plethora of “ifs,” “buts” and “maybes,” however, for the purposes of this feature, we shall try and keep things as simple as possible, and will of course need to make assumptions every now and again. HMRC have the tendency to produce guidance that somewhat baffles new landlords, however, if you are in any doubt, it is always highly recommended to seek professional assistance.

It is important to note that if you need to report rental profits on your tax return, this does not make you self employed. Income from property is treated as an investment, however, if you venture into property trading, then this would be treated differently. Property trading can include examples such as buying a property, with the sole purpose of refurbishing it and selling it on soon after.

There is a common misconception amongst those landlords we have dealt with under the HMRC Let Property Campaign, whereby there has been undeclared rental profits in the past. The common misconception is that as they pay tax through their employment income, they believe they did not need to inform HM Revenue and Customs they were receiving rental profits.

To help clarify matters here, let’s say you were an employee with no other source of income other than your £35,000 salary, and you would not be filing a tax return. Now let’s say your employer offered you a £1,000 pay rise. Although your pay has increased, your tax would increase too. This methodology thus correlates to receiving taxable property profits, in that additional tax needs to be paid; this would either be achieved through a self assessment tax return or in some cases, via an adjustment to your PAYE coding notice.

Typical types of income which you may need to report under self assessment on your tax return include the following:

INCOME

  • Employment(s) income and PAYE deductions, referring to a P60 or P45 for instance. Other employment benefits, such as medical insurance, car/fuel benefit.
  • Casual earnings
  • Pension income, referring to a P60 for instance. Rent from property letting
  • Bank or building society interest received and dividends received Self-employment income
  • Foreign, investment and trust income
  • Child Benefit, if applicable, and other taxable state benefits, such as jobseeker’s allowance

CAPITAL GAINS

  • Details relating to the sale of property
  • Details relating to the disposal of stocks, shares, unit trusts etc

OUTGOINGS

  • Gift aid or charitable covenants Pension contributions
  • Student loan repayments
  • Underpayment restrictions on your PAYE coding notice (covered later on in the feature series) Expenses incurred in letting property
  • Self-employment expenses

Moving back to the investment property aspects, before we go any further, it is important to note that you are taxed on rental profits not income. Your profits are the rental income you receive, less expenses incurred, assuming it is correct to claim these costs.

If your property is let to tenants and you are in receipt of taxable profits of over £2,500, or you are in receipt of rental income before expenses of over £10,000, then landlords will have to report this via a self-assessment tax return each year. Within this tax return, you will also need to fill in the property pages. If the property is owned jointly, you would report your share of the rental income and expenditure on your separate tax return. The joint owner would then report their share separately if required.

All your taxable income, not just rental income and expenditure should be reported via a self-assessment tax return. Once this is completed, if a shortfall of tax arises, payment needs to be made to HM Revenue and Customs. However, should you have paid too much tax, a refund can be requested from HMRC.

There is a common misconception that if you are employed, profits below £2,500 are not taxable. This is NOT the case. It still needs to be reported, but instead, under certain conditions, the profit may just be reported to HMRC and any necessary tax collected, and may mitigate the need to submit a self-assessment tax return.

Self-assessment registration should be actioned by 5th October following the first tax year-end date where the rental income was first received.

What is a tax year?

HMRC operate on a tax year basis, and do not operate on a calendar year basis. A tax year runs from 6th April one year, to the 5th April the next. At the time of writing, we are currently in the month of July 2020, referred to as the 2020/21 tax year, and this runs from 6th April 2020 to 5th April 2021.

As a further example, if your letting activities commenced in December 2019, you would need to report your rental income and expenditure for the period from when letting commenced up until 5th April 2020. This would need to reported via your self assessment tax return for the 2019/20 tax year, which is due for filing by 31st January 2021. This first year would just be a “part period” for the rental business, as the following tax return you would prepare i.e the 2020/21 tax year, would report on the rental income you received from 6th April 2020 right through to 5th April 2021.

Filling out the form

You may either register for self-assessment online or alternatively by filling out a form named SA1. However, if you are also a sole trader with self-employment income, it is better to fill in this form instead.

The form is relatively straightforward and is mainly a questionnaire of your basic credentials:

  • Title
  • Name and Address National Insurance Number
  • Unique Taxpayer Reference (only applicable if you were registered for self assessment in the past. This can therefore be ignored if you are registering for the first time)
  • Telephone Number

It will also ask why you are registering for self-assessment. As a landlord, you would select the option: “I have been getting income from land and property in the UK.”

You will also need to enter the date on which letting to tenants commenced, and it is very important to ensure this detail is entered correctly. HM Revenue and Customs now have a very detailed database of landlords, and it is imperative to ensure absolute correctness to ensure any future problems are mitigated. If you choose to instruct a tax advisor to manage your tax affairs, they will request this SA1 form, along with an “authorising your agent” form, which allows them to deal with HM Revenue and Customs on your behalf.

Once you have registered for self assessment, HM Revenue and Customs will issue you with a Unique Taxpayer Reference (UTR) number.

Once this has been received, if you wish to file online, you may register to complete your tax return online or you may file your tax return in paper format.

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