Why is accounting important for landlords?
The accounting requirements that landlords must comply with are becoming an increasingly complex area of tax and legislation. Even experienced landlords risk being caught out by the April 2020 changes to finance costs tax relief.
At Sherwin Currid our team of accountants understand the needs of landlords and have specialist knowledge of this area so are able to provide a comprehensive service, ensuring you stay compliant and tax efficient.
Regardless of whether you’re a professional landlord or you only rent out a property as a side business, you may benefit from managing your property as a business. Our specialist accountants can discuss this with you and can explain clearly the pros and cons of this.
Please be aware that even if you don’t make a profit as a landlord, you must still declare your income as a landlord.
How should landlords structure their property business?
As a landlord you have various options for how to run your business. There are advantages and disadvantages for each option and careful consideration needs to be given as to which is the best structure for yourself based on your personal circumstances.
At Sherwin Currid we have many years of experience in advising landlords on how to structure their business so that they operate as tax efficiently as possible.
The main options for structuring your landlord business are:
Receiving property income in your own name
This is the default option if you do not set up a company or other corporate structure to operate your business. You will pay income tax on any profit you make through the Self-Assessment process.
Set up a Limited Company for property, known as a Special Purpose Vehicle (SPV)
Owning your property in a Limited Company means that you will pay corporation tax on any profits. You avoid the Section 24 finance cost restrictions because they don’t apply to limited companies.
A limited company offers a tax efficient way of extracting income from your own business . This is because you can control how you are taxed personally - potentially receiving a small salary from the SPV and supplementing this with dividends. Limited companies are increasingly popular structures for landlords and there is now a significant market available in limited company mortgages.
You should be aware that HMRC will view transferring a property into a Limited Company as a sale and purchase transaction and therefore Capital Gains Tax (CGT) and Stamp Duty (SDLT) need to be managed with such transactions.
Keeping accounting records for property income
Landlords need to account for all of the income related to their business.
There are strict rules that cover what a landlord can charge a tenant in fees, this is covered by the Tenant Fees Act of 2019 which limits what can and can’t be charged to tenants by landlords and letting agents. The act also places limits on deposits and regulates how deposits need to be treated. A single breach of the act may incur a penalty up to £5,000. Further breaches may result in additional fines and may even result in a criminal offence.
The following fees are allowed under the act:
A refundable tenancy deposit. There is a deposit cap of no more than 5 weeks rent where the annual rent is less than £50,000 and 6 weeks rent where the annual rent is above £50,000.
A refundable holding deposit, when reserving a property, of no more than 1 weeks rent
Payments relating to the early termination of a tenancy
Reimbursements for utilities, communication services, TV licence and Council Tax
Fees, generally capped at £50, for changes to the tenancy agreement.
Several other fees are allowed but these need to be written into the tenancy agreement.
Understanding tax deductible property expenses
The main expenses that you need to track as a landlord will fall under the following categories:
General business expenses such as office expenses, travel costs, mobile phones and marketing and letting agent fees.
Professional fees such as accountants, surveyors, solicitors and various insurancres
Property service fees such as gardening, cleaning, decorating and building work.
Repair costs at properties although please note that costs that count as improvements are not allowable.
Property charges such as council tax and utility bills.
Care needs to be taken, as not all expenses are deductible at the end of the year. For example, under Section 24 regulations mortgage interest can no longer be claimed as an allowable expense, a 20% tax credit is given instead.
If you are uncertain about what income you need to declare and what expenses you are allowed to claim, it is worth seeking professional advice from an accountant.
Accounting software for landlords and SPVs
Traditionally, landlords used to keep their records on excel spreadsheets or even paper ledgers. These options are less frequently used these days as they are outdated, inefficient and prone to error. With the implementation of Making Tax Digital (MTD) on the horizon for landlords, then more modern solutions are advisable to ensure compliance.
There are various accounting software options available, such as FreeAgent and Xero. Sherwin Currid have experience working with all of the major software providers and are happy to talk to you about which would be best for your personal circumstances.