Holiday let self assessment question
Discussion
We're in the process of renovating a house in Cornwall to be run as a holiday let but Covid lockdowns have meant it's taking far longer than hoped to complete and get it generating income. As a stranger to self assessment I'm not sure how this will affect claiming expenses such as rewiring etc.
We bought the house in Oct 2019 and so by the time it's actually let out we'll have spend across 3 tax years before any income to show. Can the spend in 19/20 and 20/21 be used in the 21/22 return or do we need to be doing self assessments now to capture the expenses to carry forward?
If that's the case have we missed the boat for the earliest expenses?
We bought the house in Oct 2019 and so by the time it's actually let out we'll have spend across 3 tax years before any income to show. Can the spend in 19/20 and 20/21 be used in the 21/22 return or do we need to be doing self assessments now to capture the expenses to carry forward?
If that's the case have we missed the boat for the earliest expenses?
Some of those costs may not be considered allowable against holiday let income - especially if they are of a capital or improvement nature. If they are of this type, instead of being offset against letting income, they are added to the original purchase cost of the property and will only obtain tax relief when the property is eventually sold or disposed of as part of the Capital Gains Tax submission.
If you want to submit the loss claims for 2019/20, you haven't missed the boat as there is still time to submit a 2019/20 tax return. The filing deadline for 2019/20 tax returns is the end of January. You will need a self assessment tax reference so you need to contact HMRC to get one.
If the property is jointly owned, the income (and losses) from the property is split between the owners needs to be returned by each individual separately. Therefore everybody involved needs a self assessment tax reference.
If you want to submit the loss claims for 2019/20, you haven't missed the boat as there is still time to submit a 2019/20 tax return. The filing deadline for 2019/20 tax returns is the end of January. You will need a self assessment tax reference so you need to contact HMRC to get one.
If the property is jointly owned, the income (and losses) from the property is split between the owners needs to be returned by each individual separately. Therefore everybody involved needs a self assessment tax reference.
springfan62 said:
How can you claim capital allowances when you have not even commenced to trade.
I understood that pre-trading capital allowances were treated as having been incurred on the first day of trading.
I don't think anyone mentioned Capital Allowances?I understood that pre-trading capital allowances were treated as having been incurred on the first day of trading.
The question was about initial expenditure - most of which appeared to be to do with setting up the property to make it ready for use.
Some of that expenditure MIGHT be capital in nature - but, being to do with a building, unlikely to be eligible for Capital Allowances.
If it is expenditure on "bricks and mortar", it won't, but it would be added to the original cost of the building and therefore would be used when calculating the value of any gains as and when the property was eventually sold. This means of course that tax relief would be obtained but that relief would be deferred for perhaps a long time - depending on how long the property is owned.
Costs incurred in installing fittings - such as kitchen equipment MIGHT be eligible for Capital Allowances
As regards to "trading", the operation of a holiday let is looked on by HMRC as a kind of hybrid activity. Income derived from the renting out of a property is normally not defined as a "trading activity" but as "investment income". Therefore the rules regarding allowable costs, capital allowances, accounting periods etc are different to the rules surrounding running a "business" activity.
However, holiday lets fall between the two definitions. The income from a holiday let has to be accounted for on a tax year basis (i.e. a year ended 5 April). The activity cannot chose its own year end date as (say) a sole trading person can.
However, it can be eligible for slightly more in the way of "trading" type costs and Capital Allowances compared to a "buy to let".
There are also different rules regarding loss reliefs.
He mentions wiring, which is an integral feature and therefore eligible for capital allowances. Holiday lets are treated as trade by HMRC providing they satisfy certain criteria and therefore eligible for capital allowances and also entrepreneurs relief for CGT.
I suspect most of his other expenditure is capital in nature as it will be treated as an improvement, of this some of these will be fixtures and fittings and some will be integral features.
It's likely that about 25% of the cost of a complete building is allowable, either an integral feature or a fixture and fitting such as kitchen or bathroom suites.
How much is applicable in this case is difficult to judge but there are certainly some capital allowances.
I suggest OP gets an accountant to look at his situation and advise as there are some tax benefits to be achieved in this scenario.
I suspect most of his other expenditure is capital in nature as it will be treated as an improvement, of this some of these will be fixtures and fittings and some will be integral features.
It's likely that about 25% of the cost of a complete building is allowable, either an integral feature or a fixture and fitting such as kitchen or bathroom suites.
How much is applicable in this case is difficult to judge but there are certainly some capital allowances.
I suggest OP gets an accountant to look at his situation and advise as there are some tax benefits to be achieved in this scenario.
And the fact that he uses the word "We're" rather than "I am" suggests that there are at least two people involved, so he needs to ensure that all the relevant individuals involved get themselves sorted out for Self Assessment.
By the way, "Entrepreneur's Relief"as we know it is now dead. It has been replaced by something called "Business Asset Disposal Relief".
https://www.gov.uk/business-asset-disposal-relief
I'm old enough to remember when it was called "Retirement Relief".
By the way, "Entrepreneur's Relief"as we know it is now dead. It has been replaced by something called "Business Asset Disposal Relief".
https://www.gov.uk/business-asset-disposal-relief
I'm old enough to remember when it was called "Retirement Relief".
Thanks for all the replies. I'll try and answer the main points...
I was pretty much expecting I'd need to get an accountant on board, it was more a case of whether it's a job for now or once things are closer to being ready. Sounds like we need to do something this month if possible...
Yes it's joint owned, by 3 people. 2 of which I'm pretty sure are all set up for self assessment already.
In terms of spend so far the main expenses have been:
New kitchen with appliances
New bathroom
Rewire
Would these be relevant now or just in the capital gains context?
Remaining spend is decorating, flooring, furniture and all the other bits to make it a usable holiday let. The biggest spend will probably be sorting the outside out (new drive, fencing etc). From a bit of research some of these would be capital allowances but not the outdoor works I guess?
I was pretty much expecting I'd need to get an accountant on board, it was more a case of whether it's a job for now or once things are closer to being ready. Sounds like we need to do something this month if possible...
Yes it's joint owned, by 3 people. 2 of which I'm pretty sure are all set up for self assessment already.
In terms of spend so far the main expenses have been:
New kitchen with appliances
New bathroom
Rewire
Would these be relevant now or just in the capital gains context?
Remaining spend is decorating, flooring, furniture and all the other bits to make it a usable holiday let. The biggest spend will probably be sorting the outside out (new drive, fencing etc). From a bit of research some of these would be capital allowances but not the outdoor works I guess?
If the work done on the house is essentially "like for like replacement", then those costs can be claimed as "repairs" for offset against any annual Holiday Letting income.
If some or all of this expenditure is an actual "improvement"on what was there before, it would be treated as "Enhancement Expenditure" and is only eligible to be offset against a future Capital Gain. In those circumstances, you need to make sure that the original documentation regarding these costs is kept safely - sometimes for a very long time.
Some of the costs, especially regarding fixtures and fittings or equipment, would be looked on as Capital Expenditure and will be eligible for a Capital Allowance claim for offset against the annual Holiday Letting income
It is likely that the expenditure you are describing contains elements of all of the above, so it will need to separated out into the different categories and the relevant claims made.
If some or all of this expenditure is an actual "improvement"on what was there before, it would be treated as "Enhancement Expenditure" and is only eligible to be offset against a future Capital Gain. In those circumstances, you need to make sure that the original documentation regarding these costs is kept safely - sometimes for a very long time.
Some of the costs, especially regarding fixtures and fittings or equipment, would be looked on as Capital Expenditure and will be eligible for a Capital Allowance claim for offset against the annual Holiday Letting income
It is likely that the expenditure you are describing contains elements of all of the above, so it will need to separated out into the different categories and the relevant claims made.
Eric Mc said:
There are often good reasons why operating a property through a limited company is not such a great idea.
The thoughts I had in mind which appear to lean in favour of a company in this case included,- With three people sharing ownership of a property - if one wants to get out it's incredibly straightforward to transfer their shares,
- No further property stamp duty if one person sells out to the others,
- No property stamp duty payable by the buyer if they sell the whole company,
- The ability to manage cash flow and thus income tax/NI treatment of the three owners,
- Avoiding the need for three separate people to complete Self Assessment property pages, and
- Tax deductibility of loan interest.
Yes - they do. Capital Gains is a massive issue when a property is held by a limited company. You could end up with a double CGT hit and, as I'm sure you are aware, an individual gets an annual CGT allowance - companies do not.
There are also Corporation Tax issues and Business Asset Relief issues (the old Entrepreneur's Relief).
So, lots of factors to be considered before embarking on a limited company option.
There are also Corporation Tax issues and Business Asset Relief issues (the old Entrepreneur's Relief).
So, lots of factors to be considered before embarking on a limited company option.
Understood. Although an SPV company is, of course, unable to use an annual CGT allowance. The property sale is an "all or nothing" type of event. You can't sell a little bit of it each year.
As you (or someone else) suggested earlier in this thread it's definitely a subject which merits input from a paid accountant!
As you (or someone else) suggested earlier in this thread it's definitely a subject which merits input from a paid accountant!
Again, thanks for all the replies. It definitely seems I need to get moving on going through it all with an accountant.
The 3 owners thing is because it was inherited by my mum and we then bought out her 2 siblings. I think at this stage this seems to be the simplest setup but I was going to discuss the best setup going forward with the accountant too.
The 3 owners thing is because it was inherited by my mum and we then bought out her 2 siblings. I think at this stage this seems to be the simplest setup but I was going to discuss the best setup going forward with the accountant too.
Eric Mc said:
If the work done on the house is essentially "like for like replacement", then those costs can be claimed as "repairs" for offset against any annual Holiday Letting income.
If some or all of this expenditure is an actual "improvement"on what was there before, it would be treated as "Enhancement Expenditure" and is only eligible to be offset against a future Capital Gain. In those circumstances, you need to make sure that the original documentation regarding these costs is kept safely - sometimes for a very long time.
How do you decide which is which in these situations? For example the bathroom had an old suite etc and now has a new one in the same location. Is that like for like or an improvement?If some or all of this expenditure is an actual "improvement"on what was there before, it would be treated as "Enhancement Expenditure" and is only eligible to be offset against a future Capital Gain. In those circumstances, you need to make sure that the original documentation regarding these costs is kept safely - sometimes for a very long time.
I would speak to an accountant.
In the case of a bathroom you would be better off in the long run treating it as Capital Item because you can then claim capital allowances and on disposal of the asset it would also count as part of the capital cost of the property for CGT purposes.
For costs which do not qualify for capital allowances then you would want them to be classified as a repair.
Be careful though because if HMRC deem that the asset could not have been used before it was repaired they will expect you to treat the repairs as capital.
So you can't buy a property in poor condition and at a lower price and offset all the repair costs against income.
In the case of a bathroom you would be better off in the long run treating it as Capital Item because you can then claim capital allowances and on disposal of the asset it would also count as part of the capital cost of the property for CGT purposes.
For costs which do not qualify for capital allowances then you would want them to be classified as a repair.
Be careful though because if HMRC deem that the asset could not have been used before it was repaired they will expect you to treat the repairs as capital.
So you can't buy a property in poor condition and at a lower price and offset all the repair costs against income.
nutey said:
How do you decide which is which in these situations? For example the bathroom had an old suite etc and now has a new one in the same location. Is that like for like or an improvement?
The distinctions are not hard and fast but if the replacement fulfills the same function as the original, that would normally be considered to be "like for like" and therefore allowable.And never forget that one of the key attractions of having an accountant in the picture is what I call, slightly inappropriately, "the Ken Dodd defence".
https://www.dailymail.co.uk/news/article-7668473/H...
Whenever you're doing anything which involves "room for discussion" with HMRC it's IMO well worthwhile having an accountant in the middle. The rest of the time you can just say to Mr HMRC, "Yes, pop round for a chat any time you like. I've got all the information here if you want to come and look at it."
https://www.dailymail.co.uk/news/article-7668473/H...
Whenever you're doing anything which involves "room for discussion" with HMRC it's IMO well worthwhile having an accountant in the middle. The rest of the time you can just say to Mr HMRC, "Yes, pop round for a chat any time you like. I've got all the information here if you want to come and look at it."
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