Some tax questions for self assessment

[leasee123]

Hi,

1. I did a remortgage that incurred various costs such as legal fees (which are itself composed of many fees such as bank transfer fee and managing agent fee) and mortgage fee and valuation fee. It was for a 5 year fixed. Can I use these costs for tax purposes to offset capital gains in the future whenever i sell the property or do all these costs have to be used for income tax purposes? If the latter, can I spread the cost over the 5 year fixed term period in equal amounts or can i only do the total cost for the tax year it was incurred in?

2. Do all the remortgage costs, legal, valuation and mortgage fee, fall under the same category as mortgage interest is (since the costs are related to financing costs)? If the mortgage fee was added onto the mortgage, presumably i can still take this as a cost even though I have not actually paid it but instead borrowed it? There would not be any double counting going on?

3. If expenses beyond a certain amount make no difference to my post tax profit, can i exclude these costs from the self assessment? Or do I need to include all expenses even though part of these expenses make no difference?

4. If i retained some of the deposit due to damages for a previous tenancy (that has been agreed with tenants) for the relevant tax year, do i need to account for this retained amount as income for that tax year in the self assessment? Or can deposit amounts being retained by me (after agreement with tenants) be excluded from tax return since they are compensation (even though i may not have spent the money)?

Thanks

[jpkeates]

1 - The fees associated with the mortgage are not capital costs, they're operational. You can spread the costs, but over the mortgage term, not the initial fixed term. That's the proper treatment, but most people account for them in the year they're incurred.

2 - The fees are subject to the limitation on finance costs to 20% and are calculated in the same manner. Fees included in the amount borrowed were incurred as they occurred, even if the actual payment was deferred and interest is payable on the amount. It's essentially the same process as if you buy a new boiler and pay for it over a period on a credit card (or use a loan).

3 - I don't really understand that question. If the amount you can offset against tax means that your business makes a loss, you can carry the loss forwards. If the amount you can offset takes your income below the personal allowance, you would still need to report it. In practice it probably won't make any difference, but you can be penalised for completing a tax return incorrectly.

4 - Money retained from a deposit is income and needs to be reported. If you didn't incur any actual costs, it's, essentially, profit.

[leasee123]

Thanks jpkeates, much appreciated.

1. So assuming a 30 year term, I can apportion all the remortgage costs by a 30th for each of the years? Even if I remortgage again in 5 years time (after the initial fixed term expires) and subsequently add on the 2nd remortgage costs as well (by that time it would be apportioning over 25 years? What if the 30 year term was rolled over to a new 30 year term in 5 years after the fixed term ends?

Would the above be true even if I fill in tax return using cash basis accounting and not accrual basis?

2. Understood - thanks.

3. Sorry I did not explain it clearly. Say I have MORE THAN enough expenses to bring my net profit below personal allowance threshold. Can I exclude the expenses from my tax return that won't make a difference in terms of reducing my tax liability (since I will be below PA threshold without these expenses)? Reason I am asking is that for some expenses, I did not get a receipt/invoice etc so I rather not include these in case HMRC ask for proof in the future.

Or are HMRC strict in that I need to declare all expenses regardless of their impact on the amount of tax i pay? Adding expenses only ever benefits the taxpayer.

4. What tax year would I declare this for exactly? Say the deposit was received at the start of the tenancy 5 years ago. Tenancy ended last tax year. Deposit was settled and agreed with previous tenants this tax year. Do i need to declare it for the tax year I received the deposit (which would be too late anyway) or for last tax year or for this tax year?

Thanks

[jpkeates]

1 - If you're working on the accruals basis, you spread the cost over the term and make a balancing adjustment when you remortgage. If you're working on the cash basis, you take the costs as they occur. To be honest, most people ostensibly working on the accruals basis probably do this in practice anyway.

3 - Strictly speaking no. In reality, I doubt anyone would notice or care. It would only be an issue if you try to claim for the expenses in a different tax year to save on tax. If you have enough expenses to go into a loss, you can carry the loss forwards.

4 - You declare it for the tax year you received the money (cash basis) or when it became due, i.e. the tenant agreed to the payment (accruals basis). In real life, they're likely to be so close as not to make any difference. It's not when you got control of the money, it's when the money became your income.

[Gordon999]

Item 4. The retention of part deposit was settled within this tax year and should be reported in tax return for 2020-2021.

[leasee123]

1. Since I work on a cash basis, your reply suggests I won't be able to apportion over the mortgage term so will take 100% of the costs fully in the year it was incurred.

3. I won't be in a loss even with all expenses taken into account so carry forward loss would not apply. I will exclude the expenses that would not make a difference to tax liability to make things easier given, as you say, no one will notice anyway.

4. Since I am on cash basis and I received the deposit 5 years ago, would it not be too late? Or are you saying since it was decided and agreed with tenants that some deposit is to be retained that is when it becomes my income? So the year I report it for would be 21/22 tax year? Or would it be for tax year when tenancy ended which would be for 20/21 (which Gordon999 seems to suggest)?

Thanks

[Gordon999]

The tax year ( 20 /21 ) just ended on 5 April 2012 ( Easter Monday ) .

For the tax year ( 20/21) which has just ended , you will report the rental income and expenses details by online tax return before 31 Jan 2022.

[leasee123]

Yes I understand that Gordon, but for which tax year do I report the deposit for?

[jpkeates]

[QUOTE=leasee123;n1151274]1. Since I work on a cash basis, your reply suggests I won't be able to apportion over the mortgage term so will take 100% of the costs fully in the year it was incurred.[/QOTE]Good.

3. I won't be in a loss even with all expenses taken into account so carry forward loss would not apply. I will exclude the expenses that would not make a difference to tax liability to make things easier given, as you say, no one will notice anyway.

A prudent person would claim everything just in case something in the return was challenged, but that's beyond belt and braces level.

4. Since I am on cash basis and I received the deposit 5 years ago, would it not be too late? Or are you saying since it was decided and agreed with tenants that some deposit is to be retained that is when it becomes my income? So the year I report it for would be 21/22 tax year? Or would it be for tax year when tenancy ended which would be for 20/21 (which Gordon999 seems to suggest)?

A deposit is the tenant's money held by the landlord, so you don't receive anything for tax purposes when you are given it.
You don't, for example, report it as income and pay tax on it.

When the tenant agreed that you could keep some of it as compensation for something, it (or some of it) became yours and is taxable income at that point.
Whichever tax return covers the date of that event is the one to record it on.
If it happened between 6 April 2020 and 5 April 2021 its the tax return for that tax year, if after 5th April this year it, the tax year we're currently in and for which a tax return is due next year.

[leasee123]

Thanks a lot jpkeates, that pretty much clarified all my questions. A great help as always.