Keeping on top of your accounts month by month makes the annual self-assessment tax return task easier and makes sure you are in control of your business.
Whether you use dedicated accounting software, a spreadsheet or simply a written accounting book, you need to record your income and expenses accurately, keeping all receipts and invoices, as and when they occur, or you tend to forget what’s what. Otherwise, your annual task is far more difficult and time consuming. You should also be doing some basic budgeting in the form of a Cash Flow Forecast - see an example below.
There are two deadlines for filing: the paper return with a deadline of 31 October – already gone if you missed this year – or the online tax return by midnight on 31 January.
You file your tax returns one year in arrears, so currently you will be working on the income you received and the related expenses for the tax year April 2023-2024
HMRC’s tax return notes 2023-24 will help you complete your tax return this time.
Don’t forget to record all capital expenditures – those costs that HMRC won’t allow as expenses – in your dedicated property file, so you can offset them against capital gains tax (CGT) when you sell the property.
Disclaimer: This article applies primarily to England and is not a full interpretation of the HMRC rules - only a tax tribunal can decide. Although the rules may be similar in other jurisdictions, there can be significant differences. Use this article as a starting point guide, not an endpoint. Always seek professional advice before making or not making important decisions.
Make sure you are aware of all your taxable income and what you can claim as allowable expenses to reduce your tax bill as much as possible, within the rules.
There are some changes to HMRC’s new digital platform reporting rules and don’t forget to include any student loans, pension and charitable contributions. Any rental income you received in the relevant tax year – the year ending 5 April 2024 – must be declared on the online self-assessment tax return, income and expenses, by the 31st of January 2025, along with any tax liability payment.
If you use an accountant, they will advise you on what’s to be declared and the expenses you can claim, but when you do your own return, you will need to be aware of the rules. If you do use an accountant, presenting them with a complete and understandable set of records will make their job easier and minimise their fee.
Bringing your account up-to-date and getting an annual computation is not the most enthralling job you’ll ever do, but it’s an important one and one that forces you to take stock of your return on investment.
It’s easy to fall into the trap of putting this task off until the last minute but be aware there are penalties for late filing and what is more important, for inaccurate filing as well. If you miss the deadline, you will join the 1 million or so other late filers who last year paid the £100 fine plus £10 per day. You may also cop for a late payment penalty and the rate of interest on this is no longer to be taken lightly - at 7.25% and increasing again for next year.
If you’ve had any investment disposals within the period, where you made a capital gain, don’t forget the step reduction in CGT relief. For the tax year 2023-24 the CGT tax free allowance per person was reduced to £6,000 per person (£12,00 if you own a rental property jointly with a spouse or civil partner) down from £12,300 in 2022-23, (£24,600 per couple). This will decrease again to £3,000 for the current tax year, 2024-25.
Calculate your capital gain by deducting the purchase cost from your selling price, while also deducting all expenses – capital spending such as structural repairs and buying and selling costs. is why you need to keep long term records of these. The final balance (gain) is taxed at 18%.
If you are thinking of the disposal of several assets, say a portfolio of properties, try to spread these out over several tax years if you can, to take advantage of your annual reliefs, though this is becoming far less advantageous with the reductions.
If you are drawing dividends from investments or if you operate through a limited company the dividend allowance decreased from £2,000 in 2022-23 to £1,000 for 2023-24, and again this will reduce to £500 for 2024-25.
If you become a sole trader or a landlord after 6 April 2026 you do not need to start using Making Tax Digital for Income Tax until after you have submitted your first self-assessment tax return, but you can choose to voluntarily sign up at any time.
When you submit your first self-assessment tax return, HMRC will check if your qualifying income is more than £30,000. If it is, they will let you know when you must start using Making Tax Digital for Income Tax.
If you’re using Making Tax Digital for Income Tax for one business and then start another, they will tell you when you must start submitting digitally with the new business. You do not currently need to use the service if your qualifying income is £30,000 or less.
HMRC sets out the expenses you are allowed to consider against your rental income when you work out your taxable rental profit, so long as they are wholly and exclusively for the purposes of renting out the property.
Since April 2017 mortgage interest relief has been gradually reduced year by year, restricted to 75%, then 50% and then 25%. From the 2020/21 tax year, only a basic rate deduction is allowed, currently 20%. This restriction does not affect limited companies with mortgages on rental properties, or currently furnished holiday lets, though this latter will change to bring them into line with buy-to-lets. Commercial property rentals are not subject to these restrictions.
The mortgage interest restriction is known as the 20% tax credit for landlords. It provides 20% tax relief on the lower of:
If the lower of these three figures is not finance costs, the difference can be carried forward. Any unused finance costs can be carried forward and added to the total finance costs for the following tax year.
These are the main types of expenses you can deduct if they relate directly to your rentals business:
Expenses that cannot be deducted, including:
If you have student loans these should be included on your self-assessment return to calculate your total income and tax liability.
If the allowable expenses are more than your rental income there will be a loss. This loss can be carried forward to offset against profits in future years. If there is a portfolio of properties, income and expenditures can be combined to reach an overall profit or loss for the year.
Make sure you double check everything before submitting to HMRC, there could be penalties if you have made mistakes. If you discover later that you have made a mistake on your tax return you can correct it. You have a 12-month period in which to inform HMRC, which will either involve paying more tax or getting a refund.
If you are likely to have to pay significant amounts of tax, there are several ways to reduce this. Think about pension contributions from income and charitable donations to be included in your self-assessment tax return.
If you are a higher or additional-rate taxpayer, you can claim the difference between your top tax rate (40 or 45 per cent), and the basic rate of 20 per cent, on the total value of any of your Gift Aid donations or pension contributions.
For Gift Aid, the 20 per cent basic rate of tax relief goes to the charity; for pension contributions, it is normally paid directly into your pension. But you must claim the rest.
Completing your tax return provides a good opportunity, having looked back over the previous tax year’s results, to look forward and plan your finances into the future.
One way to do this is by using a Cash Flow Forecast. These are usually compiled on a 12-month rolling programme using a spreadsheet, whereas one month falls away, you can add another, for 12 months hence.
This exercise gives you warning of trouble ahead, giving you plenty of time to make alternative plans if, for example, you think your business could run out of cash. With a rental business, usually expenses are predictable, mortgage payments are the same each month as are insurance and other regular bill payments. Apart from the unexpected items failing such as a gas boiler, kitchen appliances or property repairs, such as a new roof, most expenses are routine.
Likewise with income, regular rent coming in month after month, though a rogue of none paying remnant can play havoc with that. The key thing is to have a plan, a forecast that gives peace of mind knowing that you’re heading in the right direction, normally indicated by a steadily growing bank balance.
A cash flow forecast is a tool – a spreadsheet - that predicts the timing and amount of cash a business will receive and pay out, usually over 12 months. Managing cash flow is the most important part of managing any business - running out of cash usually means curtains!
Steps to creating a workable cash flow forecast:
Projecting ahead will show you how much money you might need to grow the business, how your costs will increase and how much profit you can make. The more you practice this sort of exercise the more accurate your forecasting will become.
Many banks will ask you for a business plan when you request a loan and a key component of that is a Cash Flow Forecast.
Here’s an example, an scaled down guide to help you construct your own cash flow forecast:
Source: LandlordZONE
Main Image - credit to Mikhail Nilov
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