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On 5 December 2013 George Osborne, Chancellor of the Exchequer, gave his Autumn Statement in Parliament. Key announcements included:
- A rise for the Personal Allowance, as was long-anticipated, to £10,000 in 2014/15;
- the higher 40% tax rate threshold also increasing to £41,865;
- A new, transferable, tax allowance of £1,000 for married couples and those in civil partnerships from April 2015;
- For employees aged under 21 employers will not have to pay Class 1 National Insurance (‘NI’) Contributions on earnings up to the Upper Earnings Limit;
- Capital Gains Tax (‘CGT’) for future gains will now also apply to NON-resident individuals from April 2015 (previously this had been applied only to UK resident landlords);
- For 2014/15 the annual ISA subscription limit will increase to £11,880 (of which £5,940 can be in cash);
- There were also announcements relating to the continuing clamp-down on tax avoidance, improvements and plans for UK infrastructure, and the proposed inheritance tax (‘IHT’) simplification for trusts.
HMRC (Her Majesty’s Revenue & Customs) has announced some new initiatives over the course of the last month and one of these is The Let Property campaign which is a campaign designed to recover undeclared tax from those receiving income from residential property lets. The idea is to encourage those landlords with under-declared income or gains (potentially including income tax, Capital Gains Tax and VAT) to contact them in order to make a full disclosure. By doing so they may well avoid the higher penalties which may be applied to them should HMRC discover the undeclared income/gains via other means. Don’t forget that they now have access to information shared across systems, including in relation to properties both at home and abroad, as well as being gained through their digital intelligence system ‘Connect’ which identifies links between individuals, entities and properties. So the message to landlords is loud and clear!
The campaign applies to landlords whether they have just a single property or a large portfolio of properties and encompasses lets to students, business workforces and the holiday market. Read more
As a landlord or a property investor, you are able to claim interest relief by offsetting it against your lettings income. So even if you have an interest-only mortgage or a repayment one you can still claim the interest.Also if you take a personal loan and you use it entirely for the purpose of your rental business, you can claim the interest on the loan as an expense.
Very important to remember is that you can only claim interest against a loan up to the value of the rented property when first let. The capital account cannot be overdrawn.
There is a possibility to re-mortgage for a greater amount and claim this when the additional amount is used for the purpose of an investment property or wholly and exclusively for the business property.
You can claim interest on your mortgage even when your property is empty.You do not have to split the interest on the mortgage if you are genuinely trying to let the property but it is empty because it has not been able to find a tenant. In this case the interest will meet the ‘wholly and exclusively’ test. It will not meet this test if you have not been trying to let the property or you have been using it for private or non-business purposes .
Commercial letting is defined as ‘let on a commercial basis and with a view to the realisation of profits’.
Accommodation is furnished if the tenant is entitled to use of sufficient furniture.
It will generally be necessary to calculate the furnished holiday lettings profit or loss separately from the rest of the rental business.
If a letting is to qualify as furnished holiday letting(FHL)a few conditions should be met:
• the property to be in the UK ;
• property has to be furnished;
• property should be available for holiday letting to the public for at least 140 days a year;
• it should be let commercially for 70 days or more, and
• cannot not be occupied for more than 31 days by the same person in any period of 7 months.
The difference between residential lets and holiday lets is that with residential ones you can claim a certain relief called wear and tear as compared to the holiday ones where you can claim capital allowances.
Capital allowances can include the cost of furnishings and furniture, and equipment such as refrigerators and washing machines.
Another important difference between residential and holiday lettings is that with holiday ones you can offset any loss you make in the year against other type of income.
You may also be able to take advantage of Capital Gains Tax (CGT) reliefs, such as ‘business asset roll-over relief’.
For example, if you reinvest within three years in another UK holiday letting property or certain other assets costing the same as or more than you got for the property you have sold, you may be able to defer payment of CGT until you dispose of those new assets.
To work out your taxable profit you deduct your allowable expenses from your gross rental income. These include:
•Letting agent fees (where applicable)
•Legal and accountant fees
•Buildings and contents insurance
•Interest on mortgage payments
•Maintenance and repair costs (but not improvements)
•Cleaning or gardening
•Other costs related to letting the property, such as phone calls, advertising and stationery.
Landlords with income from furnished holiday accommodation in the UK are
currently treated as if they are trading for certain tax purposes, as long as they
satisfy the above criteria.
Landlords with income from furnished holiday accommodation elsewhere in the
European Economic Area (EEA) cannot currently qualify for this treatment. They
were treated instead in the same way as landlords of other types of overseas
property, under the property income rules.
The Government has decided it should repeal the Furnished Holiday Lettings rules from 2010-11.
Next week we are going to talk about these changes in more detail.
If you’re thinking about letting furnished rooms in your home, you may want to take advantage of the special Rent a Room Scheme . Under this scheme you can be exempt from income tax on profits from furnished residential accommodation in your only or main home if the gross receipts you get (that is, before expenses) are £4,250 (£2,150 if letting jointly) or less. But you can’t then claim any of the expenses of the lettings.
A lodger can occupy a single room or an entire floor of your home. It does not apply if your home is converted into separate flats that you rent out. In this case you will need to declare your rental income to HM Revenue & Customs (HMRC) and pay tax in the normal way. Nor does the scheme apply if you let unfurnished accommodation in your home.
There are certain advantages and disadvantages of using this scheme –Taxfile in South London can help you choose the best option according to your specific circumstances. Their tax accountants will work out whether you’re better off joining this scheme or declaring all of your lettings income and claiming expenses on your tax return.
The main point to bear in mind is that if you are in the Rent a Room scheme you can’t claim any expenses relating to the letting (for example, wear and tear allowance, insurance, repairs, heating and lighting).
If you don’t normally receive a tax return and your receipts are below the tax-free thresholds for the scheme, the tax exemption is automatic so you don’t need to do anything.
If your receipts are above the tax-free threshold, you must tell your Tax Office – you can do this by completing a tax return and claiming the allowance.
That’s all for today. Next week we will discuss, in more detail, the allowable expenses that you can deduct from your lettings income, provided you don’t use the Rent a Room scheme.
Sat: 9-1 by appointment (Sep-Jan & Apr-Jun only)