Getting tax return right is crucial for landlords and it's something that may be pushed to the back of your mind when the practicalities of letting a property and looking after tenants take over.
What's more, as you'll be well aware, there are a raft of measures being introduced over the next few years which could change the way landlords can claim tax relief.
So what do landlords need to remember when sorting out tax? And how do the changes implemented by George Osborne affect tax returns?
We've got all the key questions covered thanks to some expert advice from Simon Blum, a Senior Tax Consultant at OneE Group, who helps landlords up and down the country on all tax issues.
What does a landlord definitively have to pay tax on and declare?
SB: A landlord has to pay tax on the net profits of their rental property business in addition to income tax on any other taxable income they may have, such as self-employment income.
What expenses are deductible?
SB: All typical rental expenses, including letting agents' fees, advertising fees, repairs and maintenance and similar. Travel costs, including petrol will be available when incurred to visit properties and similar.
What about interest?
SB: It is, but not the capital element of any mortgage payment. Capital expenditure, such as building extensions are not deductible. There are changes to the way deductions are given for furnishings, and I'll expand on this later.
How does Capital Gains Tax fit into all of this?
SB: A landlord will need to pay Capital Gains Tax on the profit he or she makes when a property is sold. Stamp Duty Land Tax, estate agents' fees, advertising the property for sale are all deductible when calculating the profit. Also deductible is the cost of capital work, such as building extensions.
Is any rental income exempt from tax?
SB: Some, for example if you let a room (or more than one) in your property – known as a live-in landlord – you can earn up to £7,500 per annum tax free.
How will incoming tax changes affect tax returns?
SB: The tax return itself is unlikely to change much. For the next few years there will still be a box for finance costs, but the notes will make it clear that only a percentage of the cost should be inserted.
Once finance costs become completely disallowable, this box will disappear. There will be presumably be a new box in the main pages of tax return for the new finance cost tax reducer, which will give relief at 20% for finance costs.
What about the new Wear and Tear system?
SB: The Wear and Tear allowance box will be replaced with a ‘capital expenditure on replacement furniture/white goods’ box, or similar.
What is the one piece of advice you'd give to landlords preparing their tax return?
SB: Give your accountant the data they need early!
Sometimes complex calculations are needed, for example, if you have a capital and interest repayment mortgage it is not always easy to calculate the interest element out from the capital element. Insurance and other annual expenditure needs to be correctly apportioned throughout the year. This all takes time. If you wait until 30 January to provide information, your account may need to make estimations to ensure the return is filed on time, relying on you to tell them if the estimates are incorrect and amending the tax return after filing.
How can landlords make sure all the information they provide is accurate?
SB: Accurate record keeping is essential. File invoices and statements as soon as they are received. Give your accountant a tidy file rather than a brown envelope full of receipts. They will thank you for it, and you may receive more accurate tax liability (as well as a lower fee!).
*Simon Blum is a Senior Tax Consultant at OneE Group, an independent tax advisory firm and recognised supplier of the National Landlords Association.