If you are the owner of an apartment or other real estate, and you want to rent it out to tenants, you must know that things are not as simple as they seem at first glance. In practice, that property must have regulated documentation and tax paid, and tax is also paid on the rent money you receive from your tenants. Of course, regulations are different from one country to another.
Today we’re going to talk about tax liabilities and the most common mistakes that UK rental property owners make.
Of course, the state has full insight into the state of its residents at all times, and tax evasion is not something you would want to do. In fact, cross-data systems provide a complete profile of everyone who is registered as a taxpayer in the country.
Therefore, we advise you not to make mistakes and even hire a buy to let accountant to make sure everything goes as it should.
So, let’s get to the common mistakes and how you can avoid them.
1. Don’t be a ghost landlord
This is all about those who rent a property without including the income in their tax calculation. Those are the people who say they live in the property and don’t rent it to anyone. Surely, they have a deal with the tenants, who say they sleep for a few nights there. This way, landlords go over and above the laws and rules, and they don’t pay the property and tenant taxes. Which is probably what many people already do. Tenants give the landlords cash, and they have some internal way to manage the payments.
But, what happens when the authorities realize what you do?
In order to avoid being caught out by HM Revenue & Customs (HMRC), many landlords choose to keep their rental income under wraps. However, this doesn’t mean they aren’t paying any taxes. Rather, it means that they are choosing to pay into an account instead of claiming back through taxation. While this may sound like a good idea, it is actually illegal and should be avoided at all costs.
2. Reporting the wrong amount for a lower tax
When you rent a property to tenants, it is your duty to declare the full amount subject to the tax calculation. Also, many landlords think that if they report that they had an expense related to the property they are doing something smart. But the truth is that the rent is an interest-paid element, which brings different conditions for taxpayers.
Many people from the UK buy a second property so that they can rent it out, and with the rent, they pay off the costs up to that point. However, many people also make fatal mistakes when trying to pay less property tax. In fact, at some point, it will all come to light and you will have to pay extra for the past periods.
3. Issues with mortgage repayments
Incorrect deductions can lead to tax difficulties. You should check your mortgage statement carefully before submitting them to HM Revenue & Customs (HMRC). Some mortgages include interest only and do not require repayment of the loan amount.
However, a number of mortgages are repaid through monthly installments and those payments must be taken into account when calculating rent. If you made a mistake in deducting your repayments from your rental profit, you may find yourself paying back money to HMRC.
4. Prices of home equipment
Many landlords try to overcome tax challenges by not reporting the initial cost of furnishing the property. It’s a really simple fee on your tax return, but what many don’t understand is that this fee is not deducted from your rent.
Of course, if there are certain replacements and improvements, then you can deduct that from the amount of rent. The laws are simple – if you rent out a furnished property then it is your expense, not your tenants. That’s why you wouldn’t be able to deduct it from the amount you have to pay taxes on.
5. Repairs and improvements to living conditions
Technically speaking, landlords can deduct both repairs and improvements made to rented properties. However, if these expenses are too high relative to the rent collected, then the landlord may not be able to write off the larger expense (i.e. the repairs). In addition, landlords do not generally get to deduct the cost of upgrades to the property, as those costs would be considered capital expenditures.
How do we make sure we avoid mistakes?
As a rental property owner, you must be aware of all the tax obligations that come with it all. For example, you must know what you intend the rent for, whether it is a reinvestment, payment of a property installment, or is it your pure earnings. That is why you must not skip your tax activities. If there is a need, you can also hire an accountant who will complete his work professionally.
That way you also avoid making costly mistakes, but they can also bring you as many benefits and savings as possible. But complete tax evasion is impossible and unacceptable, so you must avoid it at all costs.
When you rent out a property, it’s quite normal to have ongoing costs around it. Therefore, we advise you to give a fair amount of rent and manage the whole process like good hosts. Only then will you have permanent tenants who will treat your property as if it were their own.
Tax obligations and the correct attitude towards tenants are mandatory when it comes to your landlord obligations. We wish you the tenants you deserve who will treat your property as their own home. That’s the only way things will go smoothly, without any problems and challenges.
This article was dedicated to your property tax activities. Of course, a little conversation about how to be a good landlord won’t hurt. We hope that we have helped you to understand the mistakes that are often made, and also to avoid repeating them.