First time landlord - advice please
Discussion
My girlfriend and I are letting our flats out so we can rent a house together. She's moving into mine this weekend so she's ready to let. I'll be ready next month.
We've spoken to our mortgage providers and they've consented to it.
How do you handle the finances for the properties you let out? Is it worth setting up a bank account solely for income and expenses so it's easier to track?
Keeping accounts. I understand costs like mortgage interest, repairs, service charges can be offset against profit to reduce tax liability? Is this simple enough to do yourself?
My flat was built ten years so I'm conscious the in built appliances in the kitchen are on borrowed time. Can these be costs I can also use to reduce tax liability?
I'm aware we'll need to complete a gas safety check annually. Do we need any electrical test carried out before letting?
Letting agents - no idea! Their fees vary significantly for various services. What do you recommend?
Anything else we've not thought about?
Thanks in advance!
We've spoken to our mortgage providers and they've consented to it.
How do you handle the finances for the properties you let out? Is it worth setting up a bank account solely for income and expenses so it's easier to track?
Keeping accounts. I understand costs like mortgage interest, repairs, service charges can be offset against profit to reduce tax liability? Is this simple enough to do yourself?
My flat was built ten years so I'm conscious the in built appliances in the kitchen are on borrowed time. Can these be costs I can also use to reduce tax liability?
I'm aware we'll need to complete a gas safety check annually. Do we need any electrical test carried out before letting?
Letting agents - no idea! Their fees vary significantly for various services. What do you recommend?
Anything else we've not thought about?
Thanks in advance!
We did the same, rented out both flats and moved in together.
Rental income goes into our individual bank accounts. I guess this is just personal preference, it's only 1 monthly payment so I didn't see it as a big deal. My management company just deduct any costs (repairs, gas safety, cleaning etc.) from the rent, so there's not a lot for me to do in terms of paying for stuff.
Keeping accounts is also very straightforward. At the end of the tax year ask the mortgage company for an interest statement. Keeping track of all the other costs should be straightforward, I just use a simple spreadsheet. Having said this, I have an accountant for my business, they also do my tax return, so I just sent all the costs to them and they do the tax return. Tax returns aren't complicated though, you might consider using an accountant for peace of mind.
Pretty sure appliances are classed as maintenance and repair, so that should be tax deductible.
Gas safety check is mandatory, electrical testing isn't mandatory but highly recommended for peace of mine.
We pay 10% + VAT for fully managed, I'd recommend fully managed unless you can be bothered to deal with phone calls from tenants. Just engage with a few agencies and see who you have more confidence in, within any given area the rates are usually similar.
Rental income goes into our individual bank accounts. I guess this is just personal preference, it's only 1 monthly payment so I didn't see it as a big deal. My management company just deduct any costs (repairs, gas safety, cleaning etc.) from the rent, so there's not a lot for me to do in terms of paying for stuff.
Keeping accounts is also very straightforward. At the end of the tax year ask the mortgage company for an interest statement. Keeping track of all the other costs should be straightforward, I just use a simple spreadsheet. Having said this, I have an accountant for my business, they also do my tax return, so I just sent all the costs to them and they do the tax return. Tax returns aren't complicated though, you might consider using an accountant for peace of mind.
Pretty sure appliances are classed as maintenance and repair, so that should be tax deductible.
Gas safety check is mandatory, electrical testing isn't mandatory but highly recommended for peace of mine.
We pay 10% + VAT for fully managed, I'd recommend fully managed unless you can be bothered to deal with phone calls from tenants. Just engage with a few agencies and see who you have more confidence in, within any given area the rates are usually similar.
A number of things need to be considered.
You are both becoming individual landlords so these pointers apply to both of you.
You will both need to notify HMRC within a few weeks of the first rental amounts becoming due from your tenants that you will need to submit Self Assessment tax returns.
If you commence receiving rental income within the next few weeks, this means the first tax year for which you need to complete a Self Assessment tax return is tax year 2016/17.
The deadline for filing the 2016/17 tax return is 31 January 2018. 31 January 2018 is also the date by which you have to pay over to HMRC any tax arising on the rental income.
You are taxed on your rental PROFIT, not the gross rental income. To arrive at the profit figure, you deduct from your gross rental income the following items -
Agent's Fees (if any)
Insurance Costs
Legal costs (with some restrictions)
You cannot claim legal fees for setting up a lease, for example - only for renewing a lease. You CAN claim legal costs incurred in dealing with tenant problems.
Repairs and maintenance of the premises
Any light and heat bills paid for by the landlord
Any ground rents or service charges paid by the landlord
Accounting fees
Interest and finance charges incurred on the related property loan
You CANNOT reclaim costs incurred on capital expenditure on the property. These would be costs of a large nature which make the property more valuable rather than just keep it functioning. The distinction between what is a regular "repair" item and what is "capital" is not always that clear.
Capital costs can be offset for tax purposes when completing the Capital Gains Tax computation when the property is eventually disposed of, so do ensure you keep adequate records of such costs, even if you can't reclaim them against the rental income.
From 6 April 2017, there will be restrictions on the way interest and finance charges can be relieved for tax purposes. If you are a Higher Rate taxpayer you will find your tax bill increasing even if your genuine rental profit is static.
As mentioned above, if and when the property is eventually sold, you will need to carry out a Capital Gains Tax computation on to see if you have any Capital; Gains Tax liability arising. Even if you don't, you will still have to notify HMRC of the disposal.
Up to now, this type of transaction will have formed part of the Self Assessment tax return for the year in which the disposal happens. This is changing and soon disposals of residential property will be treated outside of Self Assessment and the tax arising will be payable much earlier than the normal Self Assessment tax payment dates.
Self Assessment itself is being abolished with effect from tax year 2019/20.
On the subject of Certificates of Interest from lenders, some are better at this than others. And, they often issue these certificates showing the interest charged on the annual anniversary of when the loan was taken out. This is not really appropriate for rental accounts because you will really need to know how much interest was charged over the 12 month period ended on 5 April (not the date the mortgage was taken out).
You are both becoming individual landlords so these pointers apply to both of you.
You will both need to notify HMRC within a few weeks of the first rental amounts becoming due from your tenants that you will need to submit Self Assessment tax returns.
If you commence receiving rental income within the next few weeks, this means the first tax year for which you need to complete a Self Assessment tax return is tax year 2016/17.
The deadline for filing the 2016/17 tax return is 31 January 2018. 31 January 2018 is also the date by which you have to pay over to HMRC any tax arising on the rental income.
You are taxed on your rental PROFIT, not the gross rental income. To arrive at the profit figure, you deduct from your gross rental income the following items -
Agent's Fees (if any)
Insurance Costs
Legal costs (with some restrictions)
You cannot claim legal fees for setting up a lease, for example - only for renewing a lease. You CAN claim legal costs incurred in dealing with tenant problems.
Repairs and maintenance of the premises
Any light and heat bills paid for by the landlord
Any ground rents or service charges paid by the landlord
Accounting fees
Interest and finance charges incurred on the related property loan
You CANNOT reclaim costs incurred on capital expenditure on the property. These would be costs of a large nature which make the property more valuable rather than just keep it functioning. The distinction between what is a regular "repair" item and what is "capital" is not always that clear.
Capital costs can be offset for tax purposes when completing the Capital Gains Tax computation when the property is eventually disposed of, so do ensure you keep adequate records of such costs, even if you can't reclaim them against the rental income.
From 6 April 2017, there will be restrictions on the way interest and finance charges can be relieved for tax purposes. If you are a Higher Rate taxpayer you will find your tax bill increasing even if your genuine rental profit is static.
As mentioned above, if and when the property is eventually sold, you will need to carry out a Capital Gains Tax computation on to see if you have any Capital; Gains Tax liability arising. Even if you don't, you will still have to notify HMRC of the disposal.
Up to now, this type of transaction will have formed part of the Self Assessment tax return for the year in which the disposal happens. This is changing and soon disposals of residential property will be treated outside of Self Assessment and the tax arising will be payable much earlier than the normal Self Assessment tax payment dates.
Self Assessment itself is being abolished with effect from tax year 2019/20.
On the subject of Certificates of Interest from lenders, some are better at this than others. And, they often issue these certificates showing the interest charged on the annual anniversary of when the loan was taken out. This is not really appropriate for rental accounts because you will really need to know how much interest was charged over the 12 month period ended on 5 April (not the date the mortgage was taken out).
Edited by Eric Mc on Thursday 21st April 16:16
CGT is not payable if you are selling your main residence. Once the property STOPS being your main residence but you still retain it, it begins to become liable to CGT.
It depends on how long after the property stops being your Main Residence that determines whether CGT is an issue.
Essentially, the gain between the buying price and selling price is worked out. Then the gain is split on a time basis between the time the property was your Main Residence and the time it wasn't your main residence.
That part of the gain that relates to the period of time when the property wasn't your Main Residence is the gain that will be subject to CGT.
When calculating the time period used for main residency, this is the actual time of Main Residency plus an additional 18 months.
It depends on how long after the property stops being your Main Residence that determines whether CGT is an issue.
Essentially, the gain between the buying price and selling price is worked out. Then the gain is split on a time basis between the time the property was your Main Residence and the time it wasn't your main residence.
That part of the gain that relates to the period of time when the property wasn't your Main Residence is the gain that will be subject to CGT.
When calculating the time period used for main residency, this is the actual time of Main Residency plus an additional 18 months.
I thought the new tax regulations meant you couldn't deduct interest payments any more from the income to reduce the tax liability? I've not looked into this yet in detail as its marginal with the property I rent out but I thought that was why highly geared landlords were likely to start making loses.
JonV8V said:
I thought the new tax regulations meant you couldn't deduct interest payments any more from the income to reduce the tax liability? I've not looked into this yet in detail as its marginal with the property I rent out but I thought that was why highly geared landlords were likely to start making loses.
There is a restriction on the claim but it hasn't been removed completely.On a more non-technical note, once you've let your flat out do stop thinking of it still as 'your' flat or home. The tenant will be paying a non insubstantial sum to live there and for the sole and quiet enjoyment of the property. They don't want a landlord pestering them (unfortunately been at the receiving end of this).
Good luck and hope you find a decent tenant.
Good luck and hope you find a decent tenant.
Eric Mc said:
You CANNOT reclaim costs incurred on capital expenditure on the property.
Sorry to hi-jack the thread somewhat.Edited by Eric Mc on Thursday 21st April 16:16
I understand that capital expenditure includes things like renewing kitchens and bathrooms however, I was in the position where a tenant effectively trashed both of these requiring replacement. Repair wasn't really an option.
Would this still be classed as capital or rather repair?
They were replaced pretty much like for like within reason so no betterment was done in the strictest sense.
OP - My advice on this one would be not to just trust your letting agent vet your potential tenants. If you can, you meet them and make sure you're happy with them.
Steve
Edit: Actually looking at PIM2020 it appears there are allowed and aren't capital expenditure as they were replaced essentially like for like. No additional units etc.
Edited by Stevie_P on Friday 22 April 09:41
Slightly off tangent, I own several blocks of flats, and i am subjected to both ever changing tax, letting legislation and case law, whereas residential neighbours to these properties, who let out room/s within their homes, are at a considerable advantage to me.
So if you can find, buy a larger property, with an annex for example, then there are considerable advantages to be had.
So if you can find, buy a larger property, with an annex for example, then there are considerable advantages to be had.
Eric Mc said:
CGT is not payable if you are selling your main residence. Once the property STOPS being your main residence but you still retain it, it begins to become liable to CGT.
It depends on how long after the property stops being your Main Residence that determines whether CGT is an issue.
Essentially, the gain between the buying price and selling price is worked out. Then the gain is split on a time basis between the time the property was your Main Residence and the time it wasn't your main residence.
That part of the gain that relates to the period of time when the property wasn't your Main Residence is the gain that will be subject to CGT.
When calculating the time period used for main residency, this is the actual time of Main Residency plus an additional 18 months.
So if we cash in our properties to buy a house together within 18 months of letting them out, we shouldn't have to pay CGT?It depends on how long after the property stops being your Main Residence that determines whether CGT is an issue.
Essentially, the gain between the buying price and selling price is worked out. Then the gain is split on a time basis between the time the property was your Main Residence and the time it wasn't your main residence.
That part of the gain that relates to the period of time when the property wasn't your Main Residence is the gain that will be subject to CGT.
When calculating the time period used for main residency, this is the actual time of Main Residency plus an additional 18 months.
I'm guessing at the point of letting, we need to get valuations so the differences in price can be worked out.
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