** KPSK NEWS **

HMRC has recently announced that it has launched a campaign targeted at people who have income from property and have not declared it on their tax returns.

The income includes:

• income from renting a room
• buy to let income
• furnished holiday letting income

This HMRC campaign is targeted at those who have income from property that has not been declared in their tax return. They will issue a letter with a help sheet and declaration form requesting details of property income from 2001/02 to date.

Below is a basic guide, please note - it should not be used as a definitive guide, since individual circumstances may differ. Specific advice should be obtained. Call KPSK or email. Click here!!

Further Descriptions are set out below...

Rent a room relief – income tax

Where a home owner lets part of his main residence to a lodger, rental income is only chargeable to income tax to the extent that it exceeds £4,250. There is no limit to the number of rooms, but only £4,250 in total is exempt. This figure has remained unchanged since 1997-98. HMRC state that income from property that is within the total exemption is to be disregarded for tax return purposes.

Buy to Let

Letting property, a ‘business of letting’ for income tax purposes, is not a trade, but is treated as one for many tax purposes.

Expenses available include:
* advertising for tenants
* rent collection costs
* bad debts
* agents’ charges for management
* accountancy fees for accounts preparation
* repairs to property
* 10% wear and tear allowance (i.e. 10% of net rental income, excluding rates, water rates and council tax if paid by the landlord) etc will be deductible for income tax.

Capital expenditure is not allowable.

Interest paid

Interest paid on loans used to buy the land or property used in the rental business, for improvements or alterations, repairs etc. will be deductible, together with incidental costs of arranging loan finance.

Using the home loan

People often use the equity in their own home to fund buy to let properties. It does not matter what the borrowing is secured upon, provided the interest is incurred wholly and exclusively for the purposes of the business of letting.

Joint accounts

It may be the case that the buy to let property is in one person’s name but the main residence is in joint names. HMRC usually normally allow relief for the home funded interest provided the letting business bears the cost of the interest. It is advisable to ensure that money passes from the business account to the joint account to fund the interest.

Losses

Losses can only be set off against other income from UK property (if they are losses from UK property) or overseas property if they arise from overseas property. The two exceptions are losses arising from capital allowances which can be offset against other income or furnished lettings losses(see below).

Furnished Holiday Letting

Furnished holiday lets are treated as a business of letting, but certain advantages, for example loss relief provisions and taper relief provisions (up to 2007-8) are more advantageous than for ordinary letting.

To qualify the property must be let on a commercial basis and with a view to profit.

In any tax year:
* the property must be available for letting to the general public not less than 140 days in the tax year; and
* the property must be actually let to members of the public for a period of 70 days in the tax year.

Letting to any person for a period of more than 31 days does not count towards the 70 days, but is a period of ‘longer occupation’.

If the property is an overseas property held by a company, occupation by a director or employee will count as a benefit in kind up to and including 2007-8. From 2008-9, this is to be disapplied.

Qualification as furnished holiday let is important as the total mortgage interest for the tax year is allowable, not just a proportion.

In addition, all general property expenses for the year will be deductible, but unlike other furnished lettings capital allowances on plant and machinery for use in a dwelling house are not precluded, but cannot be claimed in addition to the 10% wear and tear allowance.

Holiday accommodation is standard rated for VAT. If the owner has a significant portfolio of properties, his total turnover may exceed the compulsory registration threshold.

Where the property is situated in another EC country, local VAT must be charged, if that country’s threshold is exceeded. Spain, for example, has no exempt threshold.

Losses

Losses on furnished holiday letting are available against general income. They should therefore be included on the land and buildings supplement of the self assessment tax return.

Taper relief

Taper relief is available to individuals, trustees and partnerships for disposals prior to 6 April 2008. It is not available to companies, but shares in a qualifying company may qualify for the relief, if owned by an individual etc.

Taper relief for business assets was not normally given for residential property, but was available for furnished holiday let properties.