Landlords, are you maximising your profits?
We’ve noticed that some landlords forget that they actually run a business, particularly if they only have one other property and receive a reasonable stream of monthly rental. However, just like any business, there are claims you can make that will maximise your tax position and maximise your after tax profits. We are going to review these in this article.
The bottom line is simple, you are allowed to make certain expense claims associated with owning and operating a rental property. These are known as ‘Allowable Expenses’. These can be deducted from your business profits before your tax liability is calculated. The more expenses you claim, the lower your tax bill. One does need to be careful here as it’s easy for HMRC to scrutinise your claims. If HMRC has any reason to believe that you may be using expenses in a fraudulent manner, such as claiming expenses that are not truly related to running your business and therefore artificially lowering your tax liability.
So, understanding what you can and cannot claim is a great starting point in helping you revisit your expenses, making the most out of any deductions and maximising your rental income profits.
Understanding the ground rules - is it revenue or is it capital
As you might expect, HMRC are very good at creating rules that help distinguish whether any work you do on your rental property could be allowed as an expense. In this case one needs to consider if work you undertake is a capital investment or part of maintaining your revenue stream. Put another way, is the work you are doing on the property a repair or an improvement?
This is an area where landlords can make mistakes. It’s not unreasonable for the average landlord to think that refurbishing a rental property may be considered as an expense, so as to maintain revenue flow. HMRC are quite hot on this and you must think carefully as to how to apportion the expenses you incur.
When refurbishing, it’s critical you maintain accurate records showing what work constituted ‘repairs to the property’ and that which constituted ‘improvements’. For instance; painting and decorating would be an allowable expense as you are keeping the property in a rentable condition and probably honouring contractual obligations ensuring the property is fit for purpose. However, if as part of the work you decide to make alterations to the property’s configuration - perhaps make a room bigger, or add a loft room skylight, this would be classified as improvement work and therefore ‘capital’ and not an allowable expense.
If you are not able to show the split between repairs and improvement, HMRC will consider all work as capital and tax accordingly.
Capital expenses
Understanding what HMRC considers capital expenditure can help clarify what you can and cannot claim for.
When starting out for instance, it is typical for the owners to think that they could claim the cost of bringing a ‘distressed property’, probably purchased at a reduced rate, into a fit state for letting. This isn’t an allowable expense. You may however, be able to set this against capital gains allowances if you sell the property in the future. So, keep accurate records.
What is a capital expense?
If something is to be used by a business over a long period of time, they will most likely be capital expenses. For instance, where property is concerned:
- Make an addition to a property
- Improve or upgrade and existing part of the property
- Replace something with one of a higher specification
So, some expense examples that would not be allowed include:
- Extending the property
- Adding security system
- Replacing a bathroom suite with one of a higher specification
So, what can you legitimately claim for beyond the more obvious repair work?
Allowable property expenses
We arranged these in stages related to the scope of the expense.
Before you rent out a property
- Redecorating prior to a new tenant
- Replacing broken items, such as hot water systems, kitchen surfaces (as long as it’s not an improvement)
- Roof repairs
- Replacing items with their nearest modern equivalent provided the improvement is coincident to the repair.
- Replacement of items with a short useful life and of low value - soft furnishing, cutlery and crockery for instance.
- Replacement of fixtures and fittings. For instance baths, toilets, etc. just so long as they are like-for-like replacements and not improvements.
- Insurance policies for landlord, buildings and contents, public liability
- Legal fees, accountant fees
- Management and letting agent fees
- Direct costs related to advertising for new tenants, such as advertisement fees (creating and running them), telephone costs, etc.
While your property is let out
- Costs associated with garden maintenance, cleaners, etc.
- Utilities and council tax if you pay for these yourself and not the tenant
- General maintenance and repair
- Costs associated solely with running you car for business
- Fees you have to pay that are not passed on to the tenant, such as rent payments if you are subletting, ground rents and service charges.
- The interest element of any mortgage you pay on the property. This is not directly tax deductible for individuals. Instead 20% of the interest amount is allowed as a tax reducer. If the property is owned by a limited company, the full interest charge is corporation tax deductible.
What allowances are available to landlords?
Note that these are different from allowable expenses.
You have a choice; you can claim the “Property Allowance” and receive £1000 a year tax-free. However, if you claim this, you cannot then claim for your other expenses. It makes sense to use this allowance if your allowable expenses are less than £1,000.
When you rent out a residential property - a dwelling, you may be able to claim a deduction for the replacement of certain domestic items. This Income Tax relief is only available for expenses incurred from April 6 2016. It covers items such as:
- Movable furniture
- Soft furnishings and floor coverings
- White goods and other appliances
- Kitchenware
This relief can only be claimed if:
You’re letting out residential homes (dwellings)
You’re replacing an old no longer serviceable item for a new domestic one and it is only for the use of the lessee in this dwelling house and the old item is withdrawn from service and no longer available to the lessee.
You cannot have claimed Capital allowances on the expenditure
When can’t you claim this relief
- When the property is a furnished holiday let. Capital allowances will still apply though
- Rent-a-room schemes
- The costs of initial domestic items for the residential property under let
What happens if I have to buy an improved version of something?
Sometimes we have no choice but to replace something with a new and improved item. HMRC defines an improvement as:
- Not being the same or substantially the same as the old item
- Its functionality has changed - as often happens with new white goods
- It represents a material upgrade to the quality of an item - replacing. Plastic worktop with a granite one, for instance
In these circumstances you can only claim a deduction based on the cost of the old one. So for instance, if an improved replacement item costs £200 and an equivalent to the old one would have cost £150, then you can only claim for the £150.
When calculating the deduction, you should also take into account:
- The cost of the replacement item
- Any costs relating to buying it
- Disposal costs if any
Then you must deduct any income received from disposing of the item - for instance if you sold it for scrap.
In conclusion
It’s not always obvious what you can claim for and what you can’t claim for, or even how to claim, especially if you report your income through your SA100.
If you make a mistake and HMRC makes a challenge, the situation could become expensive as you may have to hire an accountant to help you.
Tax Agility has assisted many clients with their residential lettings businesses. So, it doesn’t matter if you’re running a lettings business or are an individual with a single property under let, we can help you identify your legitimate expenses, make the appropriate claims, ensure you take full advantage of any allowances, so as to maximise your rental profits. Helping individuals and small businesses maximise tax efficiency is at the heart of what we do - the clue is in our name - TaxAgility!
Call us today on 020 8108 0090 and find out if we can help your residential lettings business improve its bottom line!
Cryptoassets - what are they and what are the tax implications?
Many ordinary people and businesses, and by that we mean people who don’t usually engage in financial trading, have tried their hand at investing in crypto currencies. Some have fared well, but many over the past year have suffered significant losses, due to recent crashes in this space. As with any traded asset one may make a financial gain or a loss, but the question arises as to how one reports such gains or losses to HMRC. This is especially poignant if as an individual you’re not usually reporting via an SA100, as maybe the case with employees on PAYE, or perhaps exploring their use in your business.
This article explores the world of cryptocurrencies (and NFTs) and explains how HMRC treats them, how to report them to HMRC and what taxes you’ll be expected to pay.
Cryptocurrencies in the news
Over the past few years cryptocurrencies have made the headlines, sometimes because of meteoric price rises and at other times catastrophic crashes. Some have been caught out in what appeared as the new ‘gold rush’ - investing heavily and initially seeing significant gains, but then very quickly watching the currency crash, wiping out almost everything. In short, if you invest in cryptocurrencies you need a strong stomach as you’re in for a wild ride.
That doesn’t deter everyone though, to the point where significant numbers of people not accustomed to financial trading have put their toe in the crypto ocean - and it’s a very large ocean indeed. By March 2022 there were over 18,000 different cryptocurrencies in existence.
What is a cryptocurrency?
The definition given by Wikipedia is this: “A cryptocurrency, crypto-currency, crypto, or coin is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it.”
But why is there such an interest in cryptocurrencies? Here is a summary of the main reasons:
- It is not a ‘fiat’ currency. This means that it is not a currency controlled by a government - i.e. legal tender, like the Dollar, Pound or Euro. This of course means that because it isn’t backed by a government institution like the Bank of England, its value can vary wildly, as indeed it has recently, just like stock prices. This is why it is considered a more risky form of investment, and some would say a form of gambling. So, in short - it’s owned by everyone and no one: it is decentralised. HMRC refers to cryptocurrency as “DeFi” - Decentralised Finance.
- It is almost impossible to manipulate or forge. Unlike centralised ‘fiat’ currencies, which can be forged and manipulated because of a ‘centralised ledger’, crypo’s decentralised basis means there is no central ledger, as it is ‘distributed’, in fact, it’s part of each transaction.
- The power of the Blockchain. It’s worth spending a little time understanding the blockchain if you’re considering investing in crypto currencies. A good summary can be found here. In short though, the blockchain is a powerful piece of mathematics that encrypts and keeps track of each transaction. Every transaction has a unique code called a ‘hash’ and forms a ‘block’ of information. The block is added to the chain, which is the public database where all blocks are stored. Blocks are added to the chain chronologically and distributed worldwide among millions of computers. This is why it is almost impossible to forge or manipulate, because someone would have to control a majority of those computers in order to change the blockchain. This would also take an enormous amount of computer resources. The bigger the block chain becomes over time, the harder it is to crack.
- Privacy. While cryptocurrencies use mathematics to track transactions between parties, powerful encryption keeps personal information private, in this case the identities of the parties crypto ‘wallets’. This is one reason why cryptocurrencies have drawn bad press because it is the favoured currency of criminal gangs, money launderers and extortionists.
- Reduced reliance on the banking network. We’ve all experienced at one time or another, the problems traditional financial institutions have. This ranges from account access issues to network outages, hacked accounts and of course, bank failures, although thankfully less common. Basically, banks are a single point of failure in a system millions of people rely on daily. Cryptocurrencies were intended as a way to move away from this centralisation, making the transaction between two parties, just between the two parties - no middle men. This is another reason why governments and banks are concerned about the rise of crypto.
- Money transfer. Sending money to somebody internationally can be a real pain. Even though it is an electronic exchange processed in milliseconds, the institutions still want to charge an ‘arm and a leg’ for the service. Once you understand the process, crypto transfers are very smooth, and you don’t have anyone looking over your shoulder at the amounts or where they came from - no freeze on funds while the bank checks authenticity or reports high value fund moments to the government.
This all makes cryptocurrencies look like fantastic monetary vehicles, and they are, but they’re not without downsides. The main ones are these:
- It’s still early days and governments still have the ability to impose regulations over their use.
- If you lose your virtual wallet or accidentally delete your currency, game over. For instance the story in the press about a man whose hard drive with £210 million worth of cryptocurrency ended up in the local landfill.
- Volatility. The value of a crypto currency can change dramatically quickly.
- There’s no regulation in the crypto market, e.g. the FCA and therefore no comeback if a currency disappears or is withdrawn. Your investments are like stocks, can go up or down and are not insured like money in the bank.
- The crypto exchanges - the places where currencies are bought and sold, are not immune from hackers. Wallets stored online (hot wallets) can be lost. This is why many investors prefer ‘cold wallets’ - those stored offline - like the man in the press.
- Crypto currencies are often the target of scams on social media, with fraudsters trying to trick people into investments using crypto - precisely because they can be traced.
What are NFT’s and are these the same as crypto currency?
We won’t go into detail here as NFT’s are another deep subject to explore, but here’s a quick answer to this question.
NFTs or ‘non-fungible’ tokens are digital assets. This asset represents a real-world object, such as an image, a video, a music file. The digital files that carry the ‘work of art’ are encoded using the very same technology as crypto currencies, but that’s where the similarity ends - they are not currencies. NFTs use crypto currencies to facilitate the sale and purchases of the assets.
Fungible vs non-fungible
Simply put, fungible assets are divisible and non-unique. Cryptocurrencies like BitCoin are fungible as they can be sold in increments. Non-fungible assets are unique items and can’t be divided, like image or video or digital artwork.
NFT’s can be bought and sold just like any other form of investment asset and through exchanges just like crypto currency. Buying and selling NFT’s will however be treated the same way for tax purposes as cryptocurrency.
Should you invest in crypto currencies?
Firstly, Tax Agility is not an investment advisor and so no guidance should be inferred here, what follows is just for interest. The relative newness of crypto makes some nervous about significant investments. That said, some of those who dipped their toes in early in this market made absolute fortunes. There are still a lot of opportunities to potentially experience significant gains (and losses), sometimes in the 000’s of percent.
However, like any investment strategy, one should maintain a healthy spread of investments to help offset losses in any one asset. Crypto could be a part of a broader investment strategy, perhaps your more risky investments with potential for high upsides and losses. In short, make sure your eyes are wide open when considering this investment.
The other key point to make here and the original reason for this post, are the tax implications of cryptocurrencies. If there’s a sudden rise or fall in a crypto asset and you decide to exit, you’ll be liable for any gains made. Depending on the value of the crypto asset, this could seriously impact your personal tax circumstances. While this is also true of assets in the form of stocks and shares, the extreme volatility experienced in crypto markets is less frequent in regular investments and so allows for at least some planning or recovery time, and generally allows you to plan a more regimented exit with tax planning considerations. Dumping a large crypto asset in panic, simply because there’s little history in this market, is potentially a different proposition for some.
How are cryptocurrencies and crypto based assets taxed in the UK?
The government’s Cryptoassets Manual provides very clear guidance as to how taxes will apply depending on the circumstances and whether it’s a business or individuals involved.
At the core of this is whether or not a ‘trade’ is being carried on. Profits arising from cryptocurrency asset transactions will be considered as either income or capital gains or for a business, a chargeable gain.
HMRC’s Cryptoassets manual can be found here.
Cryptoasset taxation for individuals
Income from cryptocurrency trading
HMRC makes it clear that only in exceptional circumstances would individuals buying and selling cryptocurrency tokens (such as BitCoin) be considered trading. This would mean that an individual would need to be trading at considerable frequency and be using a degree of sophistication in the tools they use. This is more akin to a financial trading company than an individual, although some day traders may fall into this bracket.
HMRC’s Business Income Manual outlines how it determines if a trade is being carried on or not - referred to as ‘Badges of Trade’.
If the individual can prove that they are indeed trading, then the profits arising from the activity would be considered ‘trading profits’ and be considered as regular income, and therefore subject to income tax.
Most scenarios involving crypto currency trading are likely to be treated similarly to a trade in shares (investments) and therefore profits arising would be treated as capital gains and incurring capital gains tax.
In what other situations would crypto assets be considered as personal income?
Cryptoassets earned through employment
If an employee receives crypto assets as employment income, HMRC considers this as “money’s worth”. As such, this income is subject to both income Tax and National Insurance Contributions based on the value of the assets.
What happens if the employee then sells the asset acquired as employment income?
Profit arriving from the disposal of a cryptoasset token is treated as a capital gain(or loss) and subject to Capital Gains Tax.
Tokens earned through mining activities
Yes, you read that correctly - ’mining’. BitCoin, for instance, has to be ‘dug up’ or mined. This is way beyond the scope of this article, but in simple terms: each ‘coin’ is based on a unique identifier ID derived from a complex mathematical calculation. It’s rather like looking for prime numbers, the bigger they are the harder they are to find and the more computing power it takes to find them. Crypto miners invest significant sums of money in mining equipment - basically very fast, powerful computers used to crunch the numbers. These are not only expensive, but power hungry too and so the rarer a coin - such as BitCoin which has a finite number of 21 million coins (not reached yet), the greater the potential value.
However, many private individuals have tried their hand at crypto mining and need to understand how profits from this activity may be taxed.
As stated earlier, even if you consider your mining activities as ‘carrying on a trade’ and expecting profits to be treated as income rather than capital gains, HMRC will look closely determine this based upon a range of factors, including:
- Degree of activity
- Organisation
- Risk
- Commerciality
In reality, to show that a trade is being carried on, you’ll need to show significant investments in computing equipment and organisation around it, rather than the activity being based on your home computer being used in its spare time for mining activities.
If you can show a reasonable basis for trading, then any profits will be treated as regular income, otherwise CGT will be applied.
How do you report profits made from the sale of Cryptoassets?
For individuals, this will be reported through the SA100 Self Assessment tax return, specifically supplementary pages SA108 which is used to report capital gains.
Cryptoasset taxation for businesses
Even though cryptoassets may be referred to as ‘currencies’, HMRC does not regard them as such. Instead, HMRC treats cryptocurrency as a traditional asset for tax purposes.
Whether or not the sale of a crypto asset is deemed profit from a trading activity or simply a chargeable gain (or loss) from the sale of an asset, will depend on how HMRC views your firm’s activities. So, the same ‘badge of trade’ tests will be applied.
To trade or not to trade
HMRC’s Business Income Manual outlines how it determines if a trade is being carried on or not - referred to as ‘Badges of Trade’.
For most businesses, it’s likely that the sale of a cryptoasset will be treated as a chargeable gain (or loss), just like regular assets, rather than income from a trade. As such, any expenses associated with the asset may be set against the profit, or indeed any losses incurred in the sale.
More information can be found in the Government’s Cryptoassets Manual for businesses.
Reporting gains made from the sale of cryptoassets is exactly the same as that of the sale of a regular asset and would be shown in your year end company accounts as such.
Whether you’re an individual selling crypto assets or a business trading in business assets, Tax Agility can help
The tax regimes around cryptoassets are still in relative infancy. HMRC, as indeed are many tax authorities around the world, is continually reviewing the development of this new area of finance. If and when HMRC begins to treat cryptocurrency like other fiat currencies is anyone’s guess.
For many, how investments like crypto are taxed can be a little confusing, but rest assured that if you have made investments in crypto, either as an individual or a business, and have received profits or losses from trading them, Tax Agility can help you in reporting them in the correct manner. Just give us a call today on 020 8108 0090 to discuss how we may assist.