Self Assessment Deadline is looming!

[plym77]

Hi all!

Having now filled my boots at Christmas I am now back at work and in the midst of preparing tax returns and advice and thought I would take moment to mention the dreaded self-assessment.

I am sure most of you are well aware of what is required, but for those of you who aren't I thought I would take a moment to go through the basics....this is a fairly long post... you have be warned! hehe

If you started to rent a property out before 5 April 2006 you will be required to prepare a tax return for the year ended 5 April 2006 which must be submittedby 31 January 2007 to avoid paying a penalty of £100. You must also pay the tax liability by 31 January 2007 otherwise the tax will be subject to interest... current rate a whopping 7.5%pa. In addition, if the tax liability is not paid by 28 February, you will incur a surcharge of 5% of the liability outstanding at that date.

If your tax liability is in excess of £500 that it is possible that you will be subject to the payments on account regime (but this will depend on the level of tax deducted at source, for example on salary - a complicated computation to explain so I am only providing an overview!). This can be a real hit to first time landlords as they are often not aware of payments on account, which will increase tha cash needed to double in the first year, for example, a tax liability of £1,000 would mean a payment of £1,500 would be needed 31/1/07, with a further £500 due in July. The payments on account will of course be taken into account on your 2007 tax return, but for first time landlords this payment can be quite a hit!

Your tax return will cover all income received in the tax year to 5 April 2006, not just your rental profits, so for example, salary, self-employment, bank interest dividends and many more.

If you are a higher rate tax payer then make sure you claim tax relief of pension contributions made (for example personal pension contributions, and retirement annuity premiums) - this is because personal pension contributions will gain you an effective additional 18% relief, and retirement annuities a full 40% (they had no tax deducted at source for 05/6). In addition, any gift aid made will gain a higher rate tax payer another 18% on the gross payment (for example, you pay £78, the charity claims £22, but then you would claim an additional £18 deduction for tax - for a HR taxpayer only!). This is for gift aid made in the year, PLUS you can also make an advance claim for gift aid made between 6 April 2006 and 31 January 2007 (or the date you submit the return if earlier) - this claim must be made on the tax return and cannot be done in retrospect (you also need to ensure you dont claim this again in 06/7)

With regard to preparing your rental statement, you must include all rental income for the year ended 5 April 2006, so, even if say your tenant is late with the March 06 rent and it is not received until April 07, the rent still forms part of your 2005/6 assessment. In turn, any allowable rental expenses which were paid (or due, even if not paid at the year end) for the tax year are deductible.

Typical expenses are repairs, insurance, council tax (in some cases), service and management charges, and mortgage interest.

With regard to mortgage interest, it is important that you claim only the mortgage interest and not the repayment element. Also, mortgage interest can be claimed up to the value of the property at first let, so for example, a property bought as a PPR for say £100k, and then introduced as a BTL for £150k - if you have a mortgage of up to £150k then interest on that amount is allowable - this is because a BTL is considered the top slice of your mortgage borrowings.

For furnished properties, you can claim wear and tear allowance - 10% of income less council tax and water rates. Alternatively you can claim a 'replacements basis' if this is more favourable. Replacements basis means that the 'first purchase' is not allowable, butthe replacement is - ie. your purchase a cooker... not allowable, but then you replace the cooker = alowable. But to clarify - you can only have replacements basis OR wear and tear - NOT BOTH!

If you make a profit, then depending on your total income level, tax will be due at 10%, 22% or 40%.

If you make a loss, this can only be either set of against other BTL property profits in the year, or carried forward to utilise against future BTL profits - it cannot be utilised against other income in the year (unless it is a furnished holiday let)

If you are a new landlord and the property was not let until after 5 April 2006, then whilst you are not required to prepare a tax return for 5 April2006, you should nonetheless make a note of the exepenses you have incurred (for example, council tax and light and heat etc etc) as these will be deductible against your first rental period.

Typical expenses are listed on the following link:

http://www.hmrc.gov.uk/manuals/pimmanual/index.htm

Going forward.... whilst there is not much that can be done for the tax return currently due, if you are married and one spouse has low income and the other is a higher rate tax payer there are ways to put proceedures in place to divide the income between you - in some cases you could split it 50:50 with nly having to give away 1% of the property. Higher than 50% share of income to give away would involve a higher capital gift to the spouse. If you would like this reviewed, please email me for a quote.

Good luck with your tax returns - and if you need an accountant to prepare the return for you, please do contact me (sooner rather than later!) on sherena.glanton@horwath.co.uk for a competative quote.

I hope this information has helped... apologies to those of you who know all of this, I felt if would be helpful to the novices out there!

Regards Sherena