HMRC sets out key areas in its updated rental income tool kit.

HMRC updated its rental income tool kit on 1 September and for many members this is just in time for the 2016/17 tax return season.

The toolkits from HMRC provide guidance on areas of error that HMRC frequently sees in returns and set out the steps that you can take to reduce those errors. They are designed to help tax agents and their clients to:

  • ensure that returns are completed correctly, minimising errors
  • focus on the areas of possible error that HMRC considers key
  • demonstrate reasonable care.

HMRC explains these errors in terms of what it sees as the key ‘risk areas’ for ‘property rental’.

Before setting these out, the toolkit mentions a number of issues which are worth some discussion:

  • A person can act in different legal capacities. For example, a person could be the owner of a let property, be a shareholder of a company that lets property, be a member of a partnership that lets property, or a trustee of a trust that holds let property. Letting in each of these capacities represents a separate rental business. A loss on one rental business cannot be set against a profit on another.
  • Are rental profits from a trade? An often asked question and HMRC has the following to say:
  • Profits from UK land or property are treated, for tax purposes, as arising from a business. While the rental business profits are computed using the same principles as for trades they are not trade profits and are subject to a different set of rules.
  • Conversely, there may be occasions when a person is carrying on a trade of providing services in addition to letting a property. There are also certain letting activities that can amount to a trade. This is a complicated area and probably leads to more issues and queries than any other element of this subject. HMRC has provided detailed guidance which can be found here:

Separate property surplus to requirements of the trade
Expenses of let properties held as trading stock
Tied premises
Caravan sites
Hotels and guest houses
Letting property and providing additional services
Case law
Whole activity a trade
Whole activity part of a rental business
Separate trade in addition to rental business
Are the services normally provided by a landlord?

Perceived risk areas

The broad categories are:

  • Record keeping – keeping accurate and up-to-date records is essential. Poorly kept records can mean that information provided is not accurate and complete (including property disposals)
  • Property income receipts – all income (except capital receipts arising from an interest in land) is part of the rental business. Even a casual or one-off letting is treated as arising from a property rental business. As with any other business, property income can include payments in kind as well as cash receipts.
  • Deductions and expenses – rental business expenses must be incurred wholly and exclusively for business purposes and not be of a capital nature.
    Difficulties may arise where:
  • The cost has a dual purpose, partly private and partly business. A deduction can only be made for the business part where a definite part or proportion satisfies the wholly and exclusively test.
  • There are differences between revenue and capital expenditure. Capital expenses are generally not deductible in computing rental business profits. However, for more detailed guidance on capital expenses please follow this link to HMRC guidance and here for information on repairs and renewals.
  • Allowances such as rent a room relief – Income is treated as tax free up to a certain amount, unless an election is made otherwise. When gross income exceeds that amount there is a choice between paying tax on the actual profit or on the gross receipts less the tax free amount. For more details follow this link.

The toolkit contains useful checklists for agents and clients to ensure they have considered all matters. These are tailored to address the main risk areas. In addition there is a section which gives detailed guidance on each risk area along with suggested mitigation and further explanations.

The full toolkit is available here