Accountant for Property Tax Rental and Investment.

Benefits individuals can avail with property tax rental and investment

• Assist individuals with their rental property and investment planning
• Assist people and explain them about expenses which are deductible to reduce tax
• Administer end-of-year financial statements and tax returns
• Help individuals fulfill their real estate needs and desires
• Provide training on using an accounting software to keep a note of rental property transactions

Expenses individuals can claim against their rental income

• Accounting fees
• Building and contents insurance
• Charges for land and water
• Interest paid on mortgages over rental property
• Home office allowance (this is applicable if an individual manages the property on their own)
• Legal fees concerning sale & purchase of rental property
• Repairs and maintenance such as gas checks, and decorative (provided it is not an improvement to the property as such expenses are capital in nature and are not tax deductible)
• Insurance on the property
• Services, such as cleaning or gardening
• Property management fees if supervised by a different company
• Travel expenses relating to the property

Case study to understand property tax rental

Jeremy and Nick stay in the UK and plan to buy a property jointly in London. They plan to rent out the property, rather than opting to stay in it. After a few years, as the property market conditions improve, they plan to sell the property. Before they sold it, they had the property for a period of 5 years with an initial purchase price of £200,000; additional cost of purchase amounts to a total of £2,500, included solicitor’s fee and stamp duty land tax. Collectively, they were able to sell the property at a price of £250,000; this excludes additional sales costs including, estate agent fees and solicitor’s fees of £5,000. Hence, the capital gain is calculated as follows:

• Sales price = £250,000
• (-) Additional selling cost = £5,000
• (-) Cost of purchase = £200,000
• (-) supplementary cost of purchase = £2,500
• Therefore, Capital Gain payable = £250,000 – (£5,000 + £200,000 + £2,500) = £42,500

According to this, as Jeremy and Nick had purchased the property jointly, they will pay equal amount of capital gains amounting to £21,250

However, as Jeremy is a higher rate tax payer (40%) he will pay capital gains tax (CGT) as follows:

• Jeremy’s Capital Gain = £21,250
• (-) Capital gains allowance = £10,600
• Total taxable Gain = £10,650
• Payable tax charged at 28% = £2,982

And since Nick is a basic rate tax payer (20%), his capital gains tax is computed as:

• Nick’s Capital Gain = £21,250
• (-) Capital gains allowance = £0
• Taxable Gain = £21,250
• Payable tax charged at 18% = £3,825

Challenges with regards to rental property tax

In case a small business owner is getting rental income, this is just one way he / she become invested in real estate. With property investment attracting extra tax liabilities, it tends to cause unanticipated difficulties for many entering the rental investment market. At DNS Accountants, we aim to assist new and experienced real estate investors with support they need to keep the tax liability low, thereby, being able to attain financial growth. One of the most important problems related to rental property ownership is passive estate investors. Passive estate investors are defined as people whose income from rental property is considered as secondary income and they do not spend more than 750 hours in a year at their property. Since, these individuals are not permitted the same deductions; rental property losses concerned with passive ownership cannot be claimed. Additionally, ‘depreciation recapture’ is another factor – this situation arises when an individual sells a property that might result in an increase in the reported capital gains. Due to such issues, it is advisable to consult an accountant for any property tax rental and investment suggestions. At DNS Accountants, we assist clients to avoid the tax issues that might occur in rental property. As a landlord, it becomes imperative to dedicate some amount of effort towards property matters as it can help them meet the criteria of an active investor, eliminating the deduction that are applicable for a passive investors

Kinds of property

For taxation and accounting purpose, a property is mainly divided into two main types of property: residential and commercial

• Residential property, usually, means an individual’s homes, and includes apartments, flats, houses, bungalows, cottages, etc. Holiday homes are also considered a part of it category
• Commercial property includes a extensive range of properties, including factories, garages, hotels, shops, offices, pubs, restaurants, doctors’ clinic, dentists’ clinic and vets’ clinic, surgery centres, repair workshops, sports centres, warehouses, educational institutions – schools, hospitals – anything which isn’t residential, essentially

Types of taxes

There are a few UK taxes which are specific to property such as:

• Business Rates (for commercial property)
• Council Tax (for residential property)
• Land and Buildings Transaction Tax (LBTT) (for property purchases in Scotland)
• Stamp Duty Land Tax (SDLT) (for property purchases in England, Wales, or Northern Ireland)
• Annual Tax on Enveloped Dwellings (ATED) (for residential property owned by companies and other ‘non-natural persons’)

Tax is levied when property is purchased (SDLT or LBTT), rented out (Income Tax) and sold (CGT). Property investors have to pay tax when they need to buy goods or services (VAT), when they make their investments through a company (Corporation Tax) and even when they die (IHT). Those who are classed as property developers or property traders will pay Income Tax and National Insurance (NI) on the profits derived from their property sales (or Corporation Tax if they use a company). Property developers must also operate and account for tax under the Construction Industry Scheme (CIS) when using sub-contractors for even the most routine building work. When the successful investor needs to employ help in the business, he or she will have to pay pay-as-you-earn (PAYE) and employer’s NI. Without a doubt, an investor will also have to pay Insurance Premium Tax, as well as Road Tax and duty on fuel they buy as they travel in their business. They may even be paying Air Passenger Duty if their business takes them far.

We have years of experience in dealing with rental property accounting and aim to meet the investment needs of people in the UK. We assist people of UK to maximise their rental property needs. We provide services to people with one or multiple properties and through our year-around service, we aim to maximise rental investment, thereby, decreasing the stress level of individuals

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.