Based in the beautiful surroundings of the Shropshire countryside, we are here to help and assist on all landlord tax and accounting requirements, no matter how many properties you may have in your investment portfolio.
What is property management accounting?
Property management accounting is accounting for property investments. It is the process of recording income, expenditure, assets such as the properties themselves, cash in the bank, and liabilities, such as tax and loans.
Property accountant records can be held in a number of ways, from paper records right through to using cloud-based accounting software.
All landlords prepare annual accounts once a year to be able to calculate their property business profits and calculate any tax that is due. However from April 2024, landlords holding property personally, will have to prepare accounts quarterly and submit to HMRC under the new Making Tax Digital regime.
Property investors with a large property portfolio will prepare accounts on a more regular basis, to enable them to check rental income, ensure that the portfolio’s performance is on track, maximise profits, and look for tax planning opportunities.
Buy to let
Buy to let is a term used for when a property is purchased specifically for renting out. However property businesses can happen in a number of ways, including:
- Property developers that retain ownership of a property once they have completed their development
- Property that is inherited from family members
- Renting out your main residence either in part of for periods that you are absent
What taxes do I have to pay as a buy to let investor?
There are many taxes to consider when you are a buy to let investor such as:
Capital gains tax
Property investors that sell or dispose of a property could be liable for capital gains tax. This applies to limited company investments and property held personally.
Tax due is based on the difference between the proceeds of the sale and the original amount paid for the property, with an adjustment for improvements and the costs associated with the sale and original purchase.
When a property held personally is sold, any capital gains tax must be reported to and paid to HMRC within 60 days of the sale. As specialist property accountants and tax advisors, at Spotlight we can complete residential capital gains returns on behalf of our clients.
Property tax paid depends on the ownership of the buy to let property. If an individual owns the property by themselves or jointly, then the buy to let investor will pay income tax that is reported through their personal tax return.
The rate of tax paid will depend on the profits of the portfolio and other income that the buy to let investor makes. As HMRC class property income as investment income, this will be the last income that tax rates are applied to, so if your other income takes you into the higher rate (currently 40%) tax band then you will pay 40% tax on your property profits.
Unless your property is commercial or a furnished holiday let, any mortgage interest or finance costs are not part of your property profits and these are dealt with separately as a tax credit at 20% for mortgage interest relief – providing there is enough rental income to offset it.
Mortgage interest relief does not apply to commercial or furnished holiday lettings, instead the mortgage interest and finance costs is deducted as a cost from the rental income.
If a limited company (sometimes referred to as a SPV) owns the property, then the landlord will pay corporation tax on the taxable income, and the current rate of tax is 19%.
Stamp duty land tax
Stamp duty land tax is payable when a property investment is purchased. Buy to let property tends to attract a higher rate of stamp duty land tax than when purchasing the main residence you live in.
If a number of properties are being purchased, or if ownership is being transferred, then we recommend speaking to property tax specialists – such as ourselves – to ensure that you are making the most of all tax breaks.
While most residential property rental income is outside the scope of VAT meaning that there is no requirement to register if you exceed the VAT threshold, charge VAT or recover VAT on costs, there are certain circumstances where VAT registration is compulsory or would be beneficial to buy to let investors.
Furnished holiday lettings are subject to VAT, so if a property business holding furnished holiday lets grows, then the landlord needs to ensure that they are registered where required. This also applies to serviced accommodation.
Commercial property may also be subject to VAT, but this depends if there is an option to tax on it. It is always worth getting tax advice with regards to VAT on properties to ensure that your property business is operating in the most tax efficient way.
What expenses do I have to pay in property?
In general, expenses that a property business pays are direct costs that directly relate to the rental business. These can include letting agents fees, repairs, insurance, travel, replacements of some domestic items, finance costs and accountancy fees.
There are different rules for furnished holiday lettings and serviced accommodation so please seek advice.
There are two elements to a mortgage repayment (1) the interest and (2) the repayment of the loan. It is only the interest that is classed as an expense and will help reduce a buy to let investors tax position.
There a different rules for mortgage interest relief:
- As a direct expense deducted from the rental income – this applies to properties held within a limited company and furnished holiday lettings.
- As a tax credit deducted at a rate of 20% from the tax position – this applies to properties held personally either individually or jointly.
The implication of this is that higher rate tax payers could suffer 40% tax on the profits of the property and only get 20% tax relief on the mortgage interest.
In general property maintenance such as redecoration, replacement of broken parts and gardening are allowable expenses of the property business. However, where a repair could be classed as an improvement, this would not be an expense of the property business.
For example if a kitchen needed replacing and a new one was fitted on a like for like basis with a modern day equivalent, then this would be an allowable property expense. But, if the work involved knocking out a wall and replacing the kitchen with a larger upgraded version, then in most cases this would be classed as an improvement and would therefore not be an allowable expense of the property business.
What does a property accountant do?
Most property accountants will prepare your annual accounts, calculate the taxable income and tax liability due and submit all the relevant landlord tax returns on your behalf. In effect they will help you meet HMRC’s requirements.
Specialist property accountants will work with many clients within the property sector and work with you on your property journey. They will give the right property tax advice to ensure that you not only save tax, but are also holding property assets in the right vehicle for your future aspirations.
If the property portfolio is not being held in the right manner then they will be able to give specialist property tax advice to plan what to do with existing investments and future purchases.
Spotlight accounting and tax services for property investment
Spotlight Accounting is a firm of chartered accountants that work with many clients in the property sector. Being property investors and qualified accountants means not only do we bring in depth knowledge of the sector, but that we also understand business issues that are associated with a property investing business.
As a firm of property accountants, we provide a vast range of tax and accounting services from tax returns for landlords with one residential property to providing advisory services including property tax advice to investors with a large portfolio.
Services we offer include:
- Property tax advice and planning
- Preparation of property accounts
- Personal tax returns including calculation of income tax
- Preparation of Limited Company accounts
- Incorporation of limited companies
- SPV’s for property developers
- Pension scheme accounts
- VAT returns
- Capital gains tax including residential capital gains returns
Property tax can be quite complex so as property accountants we build a range of services to support each client.
Frequently Asked Property Accounting Questions
How do you do bookkeeping for rental property?
Rental books can be kept in a number of ways, from manual books through to cloud-based accounting software. With significant changes coming into effect from April 2024 and landlords having to report income quarterly, we recommend using Hammock or an equivalent so that landlords have visibility over their financials.