Starting a property business? The tax timetable explained for first-time landlords
Steve Sims runs through the initial tax timetable for first time landlords and explains what they need to know.
By Steve Sims, tax consultant and financial journalist in For Landlords.
If you are a first time landlord, keeping financial records and paying tax on rental profits often seems complicated, but you need to know your tax timetable from day one of letting your home to a tenant or you risk missing strict deadlines.
The important day is the ‘date of first letting’ which is when your property rental business starts.
The date of first letting is the day the first tenant in your first letting property is due to pay rent.
Generally, this is the day your assured shorthold tenancy agreement with the tenant begins.
You should:
- Ignore the date you bought the property or moved out of your home
- Ignore the date the tenant moves in
HM Revenue & Customs (HMRC) likes landlords to draft their accounts from April 6 to the following April 5 each year in line with the financial year.
So, if your first tenancy agreement starts, for example, on September 15, 2014, your tax timetable rolls out like this:
- Date of first letting – September 12, 2014
- Accounting period – September 12, 2014 until April 5, 2015
- Tax return due - January 31, 2016
- Tax on profits due - January 31, 2016
If the tenant signed the agreement on September 12, 2015 and did not move in until September 19, 2015, the date of first letting is still September 12, because that’s when the first rent was due.
The date the rent is paid makes no difference either. It’s when the tenant is contracted to take the house from that counts – and that’s the date on the tenancy agreement.
Your next tax year starts on April 6, 2015 and runs until April 5, 2016, and so on.
Pre-letting expenses
Most landlords spend some money on refurbishing a home before the tenant moves in. If this is your first letting property, you don't have a property business to offset the costs against.
A special rule allows you to enter these costs into your property business accounts on the date of first letting, providing:
- They are repairs not improvements
- The cost was incurred no more than seven years before the date of first letting
- The spending would be allowed if the property business was already up and running
This does not mean you can offset the costs of that kitchen or bathroom you installed a few years ago to make the home more comfortable for you. You can only enter expenses related to making the property marketable to a tenant.
Improvements v repairs
An improvement is adding something to the property that was not there before, like a conservatory or extension. It can also be an enhancement of fixtures and fittings, like adding extra kitchen units or upgrading standard kitchen worktops to granite.
A repair is usually a like-for-like expense to keep a property at a reasonable standard. Replacing the central heating pump, repainting or repointing the walls are all repairs.
Improvements are spending claimed against any chargeable gain on disposal of a property, while repairs are expenses offset against rental profits in each tax year.
Only repairs are considered pre-letting expenses and go into the accounts on the date of first letting.
TIP: Ask any tradesmen to split their invoices – one for capital costs and another for repairs. Keep the capital cost invoices in a folder for when you come to dispose of the property as they will reduce the amount of any capital gains tax due.
TIP: Never pay in cash without an invoice. This helps tradesmen avoid paying tax on their income but means you have no proof you paid for the work to claim as an expenses against tax.
Read HMRC’s guidance for tax inspectors about starting a letting business and pre-letting expenses
Steve Sims
Last Updated: 6 Aug 2015