Ever heard that tax can be taxing? Well there are seven common mistakes that experts see time and time again. Here we will let you know about them and give you more advice.
- Splitting Rental Income Incorrectly
– Partners who own properties jointly need to take caution when splitting their rental income between them on their tax returns. Couples who jointly own a rental property must declare half the profits each on their tax return. This is the case even when the property is not split 50/50. HMRC will be willing to go back six years to assess and see if they are owed or owe any tax. However, there is a way that that HMRC will recognise a split ownership that differs from the standard 50/50. This is done through a Form 17 declaration and MUST be in place before a different split can be recognised. A few exceptions do exist however, including furnished holiday lets.
- Not Filing a Tax Return
– Ignoring your responsibility to file a tax return will normally result in unnecessary penalties and added interest, not to mention the stress of a HMRC enquiry in some cases. New landlords have a duty to notify the HMRC that they need to do a tax return by 5th October (six months after the start of a tax year).
- The Capital Cost Issue
– An error seen on many occasions is recording capital costs as repair costs to lower income tax. They should in fact be taken into account, as part of your capital gains tax calculation on property sale. Different types of capital costs include: improvements to a rental property, stamp duty, and conveyancing fees.
- Mortgages: How to Apply to the New Rules
– Whilst a substantial time has passed since Section 24 was phased in, there are still countless landlords who do not fully understand how the changes affect them. An example of this is costs such as arrangement fees and mortgage broker fees which are incorporated within the property pages of your tax return, but subject to the same restrictions as mortgage interest.
- Trading and Developing
– Property owners who buy properties with the intention to “do up” a property to sell on rather than use the property for letting must declare the profits from the property. This is then treated as trading income. This ensures that the income tax is paid rather than capital gains.
- Not Keeping the Records to Back Up your Tax Return
– HMRC are well within their rights to ask for proof of the expenses that are being stated. Landlords should keep invoices, receipts and other relevant records for a minimum of 22 months (from the end of the tax year in question). In addition to this, failure to keep appropriate records can incur a fine of up to £3,000 per tax return in question.
- Overseas Property
– As a UK resident you are taxed on your worldwide rental income. Landlords will be entitled to some tax relief for any income tax paid in the property’s country, therefore ensuring you do not pay income tax more than once.