New Landlord - Self Assessment Help

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    New Landlord - Self Assessment Help

    Hi Guys,

    My wife and myself bought a property in December 2018. It needed repairs and other work such as:

    1) A New roof (Tiles felt and battens) due to porous tiles
    2) A new kitchen as it was in a bad state of repair and no one would spruce it up
    3) A new bathroom, there was no bath and toilet didn't work etc and there now is
    4) New gas boiler as the existing oil boiler did not work
    5) General decoration throughout (carpets, paint etc)

    The tenant then moved in in July 2019 so this is the start date I believe.

    My wife and I intend to split the income so am I right in thinking we should each declare 50% of the income / expenses each?

    Also I get rather confused about the mortgage interest rule, do you have any guidance on expenses or examples I could use at all? I am already registered self employed and normally do a return for my other work but I just wasn't 100% sure about how to add in this rental property. Any tips or advice would be amazing! I am afraid of missing sections or missing out on any allowable expenses. I would like to get it right as best as possible.

    Thanks for your time

    #2
    There are two types of expenses allowable for tax for a landlord, operational and capital.
    Operational expenses are allowed against income and capital expenses deducted from any capital gain for CGT on disposal.

    A lot of the expenses that you have listed would be at least partially capital, because you cleary bought the property at a lower value because of it's condition and the work that was carried out increased the value of the asset.
    Some of the expenditure was repairs which are operational which are allowed against income.

    So your first task is to break the costs into the correct category, and keep the workings because you'll need them a) when you dispose of the asset or b) to answer any queries that HMRC might have when they see an unusually large expense being claimed (although I've never heard of them querying such a claim myself).

    If you and your wife both own the property and there's no explicit split that isn't 50:50, you can split the income and costs equally.

    The mortgage interest rule looks complicated but it isn't really - except for the transitional phases, which are just a nuisance if you're starting out, because there's nothing that you are transitioning from.
    For the interest you have paid on the property, for 2019 - 20 you can take 25% and treat that as any other business expense, i.e. deduct it from the income before calculating the tax you owe.
    The other 75% is handled as it will all be next year.
    You work out how much tax you owe without including the 75% of the interest as an expense and then simply deduct the 75% value times the basic rate of tax.

    So if you have £2,000 of interest, £500 is a normal business expense and is deducted before you calculate your tax, and £300 (£1,500*20%) is deducted from the tax you owe as a final step in the calculation.
    When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
    Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

    Comment


      #3
      Thanks for this very helpful post.

      Ok, duly noted I will keep a note of what is capital and what is operational. Do you have a certain way of working out what percentage is capital on any given improvement. e.g the old kitchen that we couldn't source the same doors etc, so we had to do a nice new one to repair but naturally it also increases the value. Would it be fair to split this into 50% capital and 50% operational? same goes for bathroom?

      You explained the mortgage interest relief really well, I totally get that now. Your calculation also highlights the massive disadvantage landlords now receive with the changes but I suppose we have a country to run

      Many Thanks

      Comment


        #4
        The interest charge caught landlords who we standard rate payers, but close to the higher rate start point.

        There's no rule of thumb for the split between capital and operational.
        There's a general understanding that a new version of something will increase the value, but can still be an operating cost.
        Replacing a 20 year old boiler with a new one would still be an operational expense.
        Same with a bathroom. If it starts of with a sink, toilet and shower and ends up with broadly the same set of facilities it's probably maintenance even if the shower is more of a wet room and it's all shiny and new.

        From your description, it sounded as though the facilities weren't in the best of condition and I'd imagine the value of the property reflected that. So you might take a different approach and say that of the (made up figure) £15k of costs, £5k was your estimate of the reduction in the purchase price for the existing poor state of the property and so the £10k remainder was simply maintenance.

        Or you could itemise specific improvement items - if the work tops were particularly good or the bath wasn't your normal B&Q level.

        Or, as you say, a simple split.

        It's an art form not a science.
        As long as you can explain your thinking, you'll be fine (unless you try and be too clever), chances are you'll never even be questioned about it/
        For most people, completing a tax return and telling HMRC about your additional rental income is reasonable evidence of honesty.
        When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
        Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

        Comment


          #5
          Thanks this will really help us

          Much appreciated and learning plenty this first time round.

          Comment

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