Tax Return for Rented Property


P

paul.batch

Hi

I have a couple of question regarding my tax return I am completing.
Whilst travelling last year we rented our flat out.

1/ before leaving the UK we spend a couple of months repainting &
installing new kitchen and bathroom (no real improvements of facilities
except for the additional of a power shower). Can I claim for the costs
for the decoration works including the bathroom and kitchen as repair
costs even though the cost were incurred a couple of months before the
renting period started? Or are the kitchen and bathroom costs
considered capital improvements? I should add we were living in the
property whilst the work was taking place.

2/ As the decoration works was caried out by ourselves we have no
labour receipts. Can we made an allowance for the costs of our time?

3/ We have since returned from travelling and have moved back (about 1
month ago) into the flat which has just been sold. This is our only
property. Are we liable for capital gain tax on the sale?

Any help would be useful as I want to ensure I claim what I am entitled
to only.

Many thanks

Paul
 
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R

Ronald Raygun

1/ before leaving the UK we spend a couple of months repainting &
installing new kitchen and bathroom (no real improvements of facilities
except for the additional of a power shower). Can I claim for the costs
for the decoration works including the bathroom and kitchen as repair
costs even though the cost were incurred a couple of months before the
renting period started? Or are the kitchen and bathroom costs
considered capital improvements? I should add we were living in the
property whilst the work was taking place.
Grey area. It should not matter that it was incurred prior to commencement
of the rental business, provided it was incurred with a view to making
the flat marketable for renting, and not just for your own benefit.
It must have been incurred "wholly and exclusively" for the purpose of
the (rental) business. IR150 paras 307 et seq.

If allowable, then the maintenance and repairs, including replacements
of things with new ones of roughly equal value, would go on the revenue
account (i.e. you could set them against rental income) while any betterment
(i.e. improvents) would go on the capital account (i.e. you could set
them against gains when you sell the property in due course).
2/ As the decoration works was caried out by ourselves we have no
labour receipts. Can we made an allowance for the costs of our time?
Of course not. Any labour you "pay yourselves for" might theoretically
be an expense as far as the rental business goes, but would be taxable
income as far as your "decorating business" is concerned. To simplify
the additional paperwork this would generate, the general rule is that
you can't "charge yourself" for your own labour.
3/ We have since returned from travelling and have moved back (about 1
month ago) into the flat which has just been sold. This is our only
property. Are we liable for capital gain tax on the sale?
It depends on how long you've owned the flat and for what parts of the
time it has been your home. Obviously the time you rented it out doesn't
count as it being your home (it was the tenants' home). But chances
are the 36-month rule will ensure you won't need to pay any CGT.
That of course means that the improvements mentioned above won't
have any taxable gains to be set against, so cannot reduce your CGT
bill since it's zero already.
 
P

paul.batch

Thanks for the information.

I think I understand what I can and can't do now regarding capital and
revenue expenses. I need to look into this 36 month rule as we owned
the flat for 7 months prior to renting and I would guess 2-3 months
after the renting period (waiting for sale to process). The tenant was
in the flat for 11 month.

One thing I have notice from the self assessment form is that any
losses on the property can not be used to off set tax you have paid in
the usual fashion i.e. PAYE. They are treated as seperate entities.

Thanks

Paul
 
R

Ronald Raygun

I think I understand what I can and can't do now regarding capital and
revenue expenses. I need to look into this 36 month rule as we owned
the flat for 7 months prior to renting
Did you actually live in it?
and I would guess 2-3 months
after the renting period (waiting for sale to process). The tenant was
in the flat for 11 month.

One thing I have notice from the self assessment form is that any
losses on the property can not be used to off set tax you have paid in
the usual fashion i.e. PAYE. They are treated as seperate entities.
Yes, but does this apply to you? Have you had losses? We're talking
revenue losses here, not capital.
 
P

paul.batch

Yes this is our only property and yes we did live in the property for
the periods stated above. The property was only rented whilst we took
some time out to travel.

With regard to the losses we did lose a little due to the mortgage
company increasing their interest rate by 1% as it was rented and for
the cost of the decoration works we did to get the flat ready to rent.
The whole flat was decorated with new bathroom and kitchen installed in
an attempt to close the gap between the mortgage and the rent.

However, in terms of capital increases the property has increased in
value since Jan 2003 (when we purchased the property) which I would
guess is due to the recent housing market trends more than any
decoration we carried out.
 
R

Ronald Raygun

Yes this is our only property and yes we did live in the property for
the periods stated above. The property was only rented whilst we took
some time out to travel.

With regard to the losses we did lose a little due to the mortgage
company increasing their interest rate by 1% as it was rented and for
the cost of the decoration works we did to get the flat ready to rent.
The whole flat was decorated with new bathroom and kitchen installed in
an attempt to close the gap between the mortgage and the rent.
With your having lived in the property for such a short time both before
and especially after renting it out, it may be difficult to argue that
the decorating was carried out wholly and exclusively for the rental,
it could be argued that it was being spruced up for a sale, and that
the renting was only an interim thing which happened also to benefit
from the work.
 
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P

paul.batch

One thing which is begining to worry me now is capital gains tax as the
property was rented for more time than we live in it. Like I said above
this is our only property. If we go ahead with the sale will any gains
be liable for capital gains tax?
 
R

Ronald Raygun

One thing which is begining to worry me now is capital gains tax as the
property was rented for more time than we live in it. Like I said above
this is our only property. If we go ahead with the sale will any gains
be liable for capital gains tax?
No. Given that it *has* been your home, the 36-month rule applies.
That means the last 3 years of ownership are treated as if it was
your home even if it wasn't.
 
P

paul.batch

Once again that for your help! I am extremely please about the 36 month
rule.

I think I will go careful on the assessment of capital and revenue
costs. I am showing a loss anyway and as the loss can not be carried
forward to off set tax paid on other income there seems little point in
taking any chances. Just to figure out what private use, balancing
charges and captial allowance all means under the tax adjustment
section and then I can put this matter all to bed.

Thanks once again
 
R

Ronald Raygun

Just to figure out what private use, balancing
charges and captial allowance all means under the tax adjustment
section and then I can put this matter all to bed.
Haven't you read the notes that come with the form?

Private use is well explained there.

Balancing charges are linked to capital allowances, but forget
those, since renting out of residental property doesn't qualify
for them anyway (the SA105 form only mentions them because it
also covers other types of rental income, in particular from the
likes of furnished holiday accommodation). Capital allowances
if applicable would also suffer a deduction for private use of
the assets involved.

Sleep well.
 
P

paul.batch

I have had a good read of the guidance notes, and have a few queries:

1/ Private use - this item seems to be intended for costs such as
insurance where there has been private use for some part of the year?
Can it be extended to repair and upkeep costs i.e. decorations? Like I
mention above we have received some benefits from the decoration and
installing a new kitchen and bathroom as we live in the flat whilst the
works were being carried out - approx 4 months, but it was carried out
in in ensure we received maximum rent to easy the burden whilst we
travelled.

2/ Capital allowance I think is for items which are considered to be
capital improvements or things we have purchased. For example if our
kitchen and bathroom where considered to be capital we would include
them under this item. If we decided to go down this route is there
implication when we sell the property bearing in mind we would have
held the property for less than 36 months?

3/ Wear and tear - no problem

4/ If i claim the kitchen and bathroom as a capital allowance (if I
can) and this produce a further loss, would I be able to offset the
loss against total income for year? If I have understood this right is
it a good idea and what are the future implications?

Thanks once again
 
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R

Ronald Raygun

I have had a good read of the guidance notes, and have a few queries:

1/ Private use - this item seems to be intended for costs such as
insurance where there has been private use for some part of the year?
Yes. You said you rented it out for 11 months, I think, and no doubt
this will mean X months in one tax year and Y months in another, where
X+Y=11, and you'll be filling in two tax returns unless you're lucky
and X or Y is zero. This means you'll have to apportion fixed time
related costs like insurance and mortgage interest in such a way that
you claim X/12 of it for one year and Y/12 for the other.
Can it be extended to repair and upkeep costs i.e. decorations? Like I
mention above we have received some benefits from the decoration and
installing a new kitchen and bathroom as we live in the flat whilst the
works were being carried out - approx 4 months, but it was carried out
in in ensure we received maximum rent to easy the burden whilst we
travelled.
This stuff is, I understand, subject to the wholly-and-exclusively
rule (so is insurance etc as above, but with that, because it's time
based, it's straightforward to apportion it and say that X/12 + Y/12
of the expense was wholly and exclusively for the business and rest
wasn't). With decorating, this kind of apportionment isn't feasible.
You have to say either that the whole thing was done purely for the
business (to make it marketable for renting), or that there was an
element of private benefit *intended* when you decided to have it
done. If there was any, then it was mixed-purpose, which fails the
wholly and exclusively test, which means none of the expenditure
could be offset against income at all.
2/ Capital allowance I think is for items which are considered to be
capital improvements or things we have purchased. For example if our
kitchen and bathroom where considered to be capital we would include
them under this item.
No. You don't get capital allowances for residential lettings.
Capital allowances are for *other* types of business (including
furnished holiday lets).
If we decided to go down this route is there
implication when we sell the property bearing in mind we would have
held the property for less than 36 months?
What you incur as capital expense essentially goes on your CGT account
which has nothing to do with the SA105. It would go on the SA108 which
you'd have to fill in after the tax year in which you sold the property.
It gets set not against income, but against capital gain.

But because all your gain is relieved, because user the 36-month rule
your entire period of ownership is treated as if it had been your
home, none of your gain is taxable anyway, and so there's no point
trying to set the capital expenditure for enhancements against the gain.
The best you can do is be grateful that the enhancement may have helped
you to sell the place more favourably than had you not had them done.
More favourably in this case means either quicker or at a better price
or both.
3/ Wear and tear - no problem
And you've not forgotten mortgage interest I hope.
4/ If i claim the kitchen and bathroom as a capital allowance (if I
can) and this produce a further loss, would I be able to offset the
loss against total income for year?
No.
 
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