Don’t Throw It All Away! Record Keeping For Landlords
Lindsey Wicks, Property Tax Insider, May 2017
The records of a property business will not just relate to income and expenditure; the business will need to consider other taxes such as capital gains, stamp duty land tax (SOLT), and the annual tax on enveloped dwellings (ATED). Landlords that are VAT registered will also need VAT records, but that is outside the scope of this article.
Landlords need to keep records of income and expenditure to enable them to prepare an accurate tax return. Records will generally need to be preserved for five years following the 31 January self-assessment deadline, or six years from the end of the relevant accounting period for corporation tax. So, for the tax year ended 5 April 2017, the income tax self-assessment deadline would be 31 January 2018 and a property business within the charge to income tax would need to preserve its records until 31 January 2023. HMRC expects landlords to keep records of:
- the dates when a property’ is let;
- rent received;
- any income from other services provided to tenants (e.g. charges for maintenance or repairs);
- rent books, receipts, invoices and bank statements;
- mileage logs (for journeys that are solely for property business purposes); and
- allowable expenses for running the property (e.g. cleaning or gardening).
Many of the rules -relating to calculating trading profits apply to property businesses. One example is the ‘wholly and exclusively’ rule, which says that expenses cannot be deducted unless they are incurred wholly and exclusively for business purposes. In addition to invoices, other records such as documents, agreements, notes of meetings and diary entries might provide the evidence that the expenditure was incurred wholly and exclusively for the purposes of the business, and should be preserved as part of the accounting records. Recent changes to the rules concerning allowable expenditure for landlords mean that it is a good time to consider what other records might be needed to substantiate claims for allowable expenses.
Replacement of domestic items relief
The replacement of domestic items relief is restricted to the extent that a replacement item (e.g. a sofa, bed, or television) is not ‘substantially the same’ as the item it is replacing. Landlords with fully furnished properties will not have required detailed records of expenditure on furnishings if they had been claiming the 10% wear and tear allowance up until 5 April 2016, potentially making it challenging to substantiate claims for replacement items.
Where documents have been retained for items supplied in furnished or partly furnished dwellings, they should be preserved to help validate claims for relief for replacement items. Following the replacement of an item, the five/six year clock would start counting down in respect of the preservation of records for the original item. It follows that it is sensible to retain documents relating to the new item until it is replaced, with the five/six year clock ticking from the point of replacement.
The restriction of finance costs is another example where records should be considered. The restriction only applies to the extent that the finance costs relate to residential lettings. Where a loan or overdraft facility provides general working capital for a business with both residential and commercial lettings, the finance costs should be apportioned. The apportionment should be on a just and reasonable basis which could be, for example, by reference to property values, income generated, floor area or the amount of staff time devoted to each element of the business. The business records would need to justify and evidence the chosen apportionment method.
More than one business?
UK lettings, furnished holiday lettings, rent-a-room, and overseas lettings are treated as separate businesses with their own tax rules. It follows that income and expenditure relating to each will need to be identified and recorded separately.
Capital gains (or losses) arise on the disposal of an investment property. Records for the period from acquisition until the time of disposal will be required to compute the gain. In addition to the purchase price, invoices and documentation should be kept .for the following incidental costs relating wholly and exclusively to the acquisition and disposal:
- fees, commission, or remuneration paid for the professional services of any:
- surveyor, valuer, or auctioneer;
- accountant or agent; or
- legal adviser;
- costs of transfer or conveyance (including stamp duty or SDLT);
- costs of advertising to find a buyer or seller; and
- costs reasonably incurred in making any valuation or apportionment required for the purposes of the capital gains computation.
Enhancement expenditure will be deductible if it has been wholly and exclusively incurred for the purpose of enhancing the value of the asset and is:
- reflected in the state 01: nature of the asset at the time of the disposal; or
- incurred by in establishing, preserving or defending title to, or to a right over, the asset.
As these costs are only allowable if incurred wholly and exclusively for the purposes of the acquisition, enhancement, or disposal of the property, records that provide evidence of meeting the ‘wholly and exclusively’ requirement should be kept. Records will need to be preserved for five years following the 31 January self-assessment deadline relating to the tax year of disposal, or six years from the end of the accounting period of disposal for corporation tax.
Stamp duty land tax
All purchasers have a duty to keep and preserve records for at least six years from the effective date of a land transaction, regardless of whether a land transaction is notifiable to J-lMRC. The records should include:
- relevant instruments relating to the transaction, in particular, any contract or conveyance, and any supporting maps, plans, or similar documents; and
- records of relevant payments, receipts, and financial arrangements.
Annual tax on enveloped dwellings
Corporate landlords will need to consider whether any residential dwellings in their portfolio are within the scope of ATED. It might be possible to claim relief as a property rental business, meaning that there is no tax to pay. However, they will still need to file a relief declaration return to claim the relief. The records which enabled a taxpayer to complete their ATED or relief declaration return must be retained for at least six years following the end of the chargeable period. So, for the 2017/18 ATED year, records would need to be retained at least until 31 March 2024.
Records should include details of:
- any relevant transactions (contracts or conveyance and any supporting maps, plans, etc.);
- records of any relevant payments, receipts, and financial arrangements;
- valuations; and
- supporting documents such as accounts, books, deeds, contracts, vouchers, and receipts.
Where relief is being claimed, evidence of letting or intention to let will be required. t Relief is not available i’f the property is occupied by anyone connected with the owner.
How should records be kept?
There is currently no strict rule on how records should be kept. The taxpayer could have files or boxes of paper documents or records could be kept electronically. HMRC’s only requirement for items stored electronically is that all of the information must be captured (i.e. the front and back if the document is double-sided) and the information must be capable of being presented to HMRC in a readable format.
What if records have been lost?
If records have been lost, stolen, or destroyed, the taxpayer should try to recreate them to enable a return to be filed. When filing the return, figures that are estimated (i.e. the best attempt that the taxpayer wants HMRC to accept as final) or provisional (i.e. figures that will be updated with an actual figure) should be highlighted to HMRC.
The penalty for the failure to keep and preserve records can be up to £3,000 for each tax. Records are also important for enabling an accurate tax return to be submitted. Penalties for errors in returns are charged on a sliding scale percentage of the tax lost.
Landlords should be a””.’are of the record keeping requirements for the taxes that apply to them and consider what systems they require to preserve records for the differing time periods and for future transactions such as property disposals and replacement of furnishings.
As highlighted in my article in the May 2017 issue of Property Tax Insider, landlords should monitor HMRC’s digital development, and plan for changes that might be required to how they keep their accounting records.