Unless rental income is less than £1,000, landlords must declare it to HMRC and pay tax on any profit made by the property rental business in self assessment tax return.
The profit can be calculated by deducting allowable expenses from rental and other income of the property business. However, where it is beneficial to do so, the landlord can claim the property allowance of £1,000 and deduct this instead of actual expenses. This will work in the landlord’s favour where actual expenses are less than £1,000 (unless there is a loss to preserve).
To calculate profits (or losses) accurately, the landlord must keep records.
For all properties in the property rental business, a record should be kept of:
- the dates on which the property was let;
- rental income received;
- any income from services provided to tenants (for example if the landlord undertakes repairs and bills the tenants for this); and
- any other income, for example from the sale of domestic goods for which replacement relief is claimed.
The landlord should also keep supporting documentation, such as rent books, invoices and bank statements.
The landlord will also need to keep a record of expenses. Expenses can be claimed to the extent that they relate wholly and exclusively to the letting out of the property. Examples of expenses which typically may be incurred by a landlord include:
- agents’ fees
- advertising costs
- wages of staff
- repairs and maintenance
- cleaning and gardening
- replacing domestic items
- landlords’ insurance
The landlord should keep a record of all expenses incurred, and also supporting documentation, such as invoices, agents’ statements, bank statements, receipts, etc.
Where the property allowance is claimed instead, the landlord does not need to keep records of actual expenses. However, it is useful to do so in order to check whether claiming the allowance is beneficial, and also from a business perspective.
Method of keeping records
At the moment, the landlord can keep their records in the way that best suits them. They may prefer to use a software package designed for this purpose, a general accounting package or spreadsheets. Alternatively, they may prefer to keep manual records. What matters at this point is that adequate records are kept and will stand up to HMRC scrutiny if need be.
Looking ahead to Making Tax Digital
When Making Tax Digital for income tax purposes is rolled out to landlords, they will need to keep digital records and upload information up to HMRC quarterly via a digital account. The start date has yet to be announced, but at the time of the 2019 Spring Statement the Chancellor confirmed that it would not be introduced from 2020.
If you need advice about Records of Rental Income and Expenses call our specialist accountants today for a review of your tax planning.