Landlords, like any other business owners, have a number of important record keeping obligations. These help you to give the correct information on your tax return and save money at the same time.
Whether a residential landlord or commercial landlord, you will need to keep details of rental income throughout the year, as well as evidence of expenses. These are vital when you come to prepare your annual Self Assessment tax return.
Aside from your legal obligation to keep certain documents, an efficient record keeping routine will save you money in the long term. A remarkable number of landlords end up paying significantly more tax than is necessary, either because they are unaware of the range of expenses for which they can claim, or because they have not retained evidence of their costs. You should therefore try to get into a routine of filing receipts and invoices as you receive or raise them.
The vast majority of landlords will be required to complete an annual Self Assessment (also called a tax return). During this process you will provide details of your income during the previous financial year, as well as your expenditure. This is the means by which self-employed people have their tax bill calculated.
There are a number of key documents that you need to retain in order to fill in your tax return. These include:
- Proof of rental income
- Details of capital costs, for example furniture, including receipts
- Details of ‘allowable expenses’.
Recording your income
Landlords sometimes find it difficult to keep records of rental income as, unlike other businesses that rely on monthly payments, you will not raise an invoice before each instalment of the rent. In lieu of this, you should make sure that you keep your bank statements, and that you are able to delineate your rental income from all other transactions.
If you rent through a lettings agent, they should send you a monthly statement with the rent paid and details of their fees.
You should also keep copies of all of your tenancy agreements. These will provide details of the amount the tenant has agreed to pay, along with the dates between which your properties have been rented out.
What is capital expenditure
Capital expenditure is money spent on single-purchase items that allow you to provide a service or produce goods. In the case of landlords, capital expenditure tends to cover the purchase of furniture and fittings for your properties.
You should keep accurate and detailed records of any capital expenditure made over the course of the year. Make sure that you keep these separate from your own personal expenditure, in order to ensure that you do not over-claim on your tax return.
You should also remember that it is often possible to offset against tax the depreciation in value suffered by these assets. You can use this ‘wear and tear’ tool to reduce your tax bill over a number of years; an accountant will be able to advise as to whether or not this is possible in your case.
What are allowable expenses?
Allowable expenses cover the regular costs associated with the management and upkeep of your properties. The most common allowable expenses for landlords include:
- Building and contents insurance
- Agency fees
- Legal and accountants’ fees
- Mortgage interest
- Utility bills
- Miscellaneous costs like phone line and internet use.
HM Revenue and Customs recognise that landlords, like other business owners, incur certain costs while providing a service to tenants. These costs can be used to reduce your taxable income, and are a vital way of keeping your tax bill down.
However, it is important that you are able to differentiate between personal expenses and those incurred as a result of your business. Sometimes this can be difficult. For example, if you work from home and use an internet connection or both business and personal use, how do you calculate the amount you can claim?
In these cases, you must work out the proportion of the expense that can be attributed to business use. In some cases, however, this can be difficult. In the case of business costs for vehicles, working from home, or living in business premises. You can read more about the flat rates on .GOV.
How long to keep records
You are legally obliged to keep all relevant records for at least five years from the 31 January submission deadline for that tax year.
Record keeping is one of the less exciting parts of a landlord’s job. However, it is an important legal obligation – and one that can ultimately save you money. Try to get into the routine of filing documents as they arrive, and you can help to keep your tax bill down and your self assessment painless.