Last month saw HM Revenue & Customs (HMRC) launch six new taskforces to tackle tax evasion in specific sectors around the country.
These taskforces are specialist teams that undertake bursts of activity in what HMRC deem to be ‘high risk’ trade sectors and locations around the UK. The teams will visit such trades and examine their records and carry out other investigations. One such taskforce will be targeting property rentals in East Anglia, London, Yorkshire and in the North East.
In this article, we highlight some key areas of tax that property owners should be aware of in order to comply with their responsibilities and also highlight some Top Tips!
When is a tax return required?
There are many possible situations when a property owner might need a tax return, but the two main scenarios are when either a property is let out or when a property that is not your main residence is sold. There are conditions in both cases and in some instances, there may be reliefs available but this serves as a general rule of thumb.
There is a common misconception that when a property is let, it only needs to be declared on a tax return once it is profitable. This is not the case. There is a threshold of £10,000 for rental income at which point it must be declared; regardless of the profit.
It should also be noted that if your property or property portfolio is loss-making, there is a good reason for you to be declaring the loss now by submitting a tax return. Although it will have no tax benefit now, later down the line once the portfolio is profitable, the losses generated in the early days can be utilised. By not informing HMRC of the losses via a tax return, they would simply have been lost in the abyss.
If you are a UK resident and therefore subject to UK taxes, any rental income or gain on the sale of an overseas property will also be subject to the UK Tax regime - just as a UK property would be. However, non-UK rental income won’t be pooled with UK rental income, which is a disadvantage if one of the portfolios is loss-making and the other profitable.
If you have equity within your rental property that you want to unlock and use for other purposes, such as a new car or an extension to your home, then HMRC offer a concession in their manuals for just that. The only restriction is that the amount of equity released cannot exceed the original market value of the property when it was introduced to the portfolio.
Furnished Holiday Lets (FHLs)
Furnished Holiday Lets (FHLs) used to have some rather attractive advantages for tax purposes because they were treated virtually like a business. One such advantage was that a loss on an FHL could be offset like any other trading loss. However, since 2009 these benefits have gradually been withdrawn and the bar for attained FHL status has been raised considerably. So if you have some FHLs in your portfolio, make sure you are up to date with the changes and what impact this will have on your tax position.
The UK is a popular place to be this year with all of the events it is hosting, such as the Olympics and Wimbledon to name but a few. If you are considering renting a room out in your house to tourists or even just a lodger, the income does not need to be declared for tax purposes provided the amount involved is less than £4,250.
Tax on the Sale of Your Home
If you sell your house at a profit it is unlikely there would be any tax to pay because of Private Residence Relief (PRR). In short, to qualify for the relief, the property must have been your only home and you should have used it as a home and nothing else. It can be restricted if you have; a very large garden; you have let part or your entire home; or you have used part of the property for business purposes.
If you would have qualified for PRR but you made a loss instead of a profit, no relief is given for the loss.
HMRC will normally treat rental income from a property held in joint names as if it belonged in equal shares. However, if you actually own the property in unequal shares and are entitled to the income arising in proportion to your investment, then you have the right to be taxed on that basis. You must simply complete HMRC form 17 which is available from HMRC’s website. However, do note that they will expect to see some evidence to support your claim for the income apportionment.
Moving out and renting your home
The rental income (less any tax deductible expenses such as mortgage interest) on the let of your former home is taxable and would most certainly need to be declared on your tax return.
When you come to sell the property, any Private Residence Relief (PRR) would be restricted to only cover the period of your occupation of the property. However you may be eligible to utilise Letting Relief, which at best, can mean no Capital Gains tax to pay whatsoever. There are strict criteria to qualify for PRR and Letting Relief though.
It is recommended that you speak with a professional such as your local TaxAssist Accountant before making any significant purchases or decisions about your property portfolio. Their advice could save you a lot of unnecessary tax being paid to HMRC! But as with most tax planning, they need to be kept abreast of your decisions and changes and they need time to calculate the best possible solution.
HMRC’s Mike Eland, Director General Enforcement and Compliance, said “This is not an empty threat - HMRC can and will track you down if you choose to break the rules.” And his words are demonstrated by the fact that HMRC are on target to collect more than £50 million as a result of the taskforces launches in 2011 and 2012. HMRC are anticipating a further £23 million from the six taskforces they launched in May alone.
Posted by Jo Nockels
This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.
By Jo Nockels
Last updated July 2012