I have recently taken on a new client to complete his Limited Company accounts and personal tax return. I thought this would begin next year, however, he has sprung on me that he has a rental property. He rents it out to his son and his girlfriend but it is below the market value and some months he received no rent at all.
From my understanding if a person has received no rent for a month they can not claim any expenses for that month - is this right?
As the property is rented out below market value I believe that the expenses incurred can not create a loss? Which would leave the property accounted for on a cash neutral basis?
Any anyone has any advice or if anyone can point me in the direction of some further research it would be greatly appreciated.
interesting scenario as you have what is right and what HMRC tend to apply.
As you identify HMRC do not tend to chase people (although they could) provided that the expenses do not create a loss.
The actual rules are however somewhat different and to stay within the letter of them the expenses should be applied pro rata to the rent as a percentage of legitimate expected rental income.
For example, if annual rent should be £4000 but actual rent was charged at below market rate at only (say) £1000 which is 25% of what it should be then only 25% of the expenses (that would normally be acceptable) would be allowable.
So, in the above scenario, imagine £1000 expenses were incurred. The official treatment would be that only £250 would be allowable.
As for the question based on a single months income in this scenario I would actually annualise everything.
HTH,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
So to confirm if using the pro rata basis at 25% does that mean that the property would show a £750 profit and therefore be taxable? However, if the rental income was £1000 and the expenses worked out pro rata at £1500 at 25% then the peoperty would show a £500 loss?
so we're talking £1000 income on a property that should make rental income of £4000 on an open market.
Calculating that out the £1500 pro rata would be on £6000 expenses (I assume that a fair chunk of that is interest on the property loan?).
In that example, unless thats a one off year I would expect HMRC to say that its not actually a business at all and nothing would be claimable.
There has to be an expectation of profit for it to be considered a business. If the client is merely subsidising their sons rent then thats not a business.
Unless someone else disagree's with my analysis of this I would go with the override that the expenses must not be more than income.
I would also advise the client that those expenses compared to the expected open market income seem unrealistic.
That said of course, if serious capital appreciation in the property is expected then such may replace rental income as the primary consideration in this.
kind regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
From this year when he set up his Limited company he will be renting a room which will be used as the company office which will bring the rental income up to market value.
As it stands for this tax return, would you enter it considering it will be accounted for as cash neutral?
I'm not sure about allowing only a proportionate amount of expenses against the rental income, my understanding is that you can claim all the expenses but only up to the rental income level, i.e. you cannot claim expenses that would cause losses to be brought forward. So first of all if you are able to claim wear and tear, then you would claim the full 10% of rents and then claim all expenses upto a break even level.
your sort of correct in that HMRC are extremely unlikely to stick to the letter of the regulation to the point where its even in the ACCA advanced tax study materials that there is a variance between the letter of the regulation and its application.
In my post above I did start off by stating that there was the generally accepted practice as opposed to the rules as they should be applied (which is pro rata).
If you reread my previous posts I feel that you will agree that we are in agreement in what we are saying.
Hope that you are having a good day,
kindest regards,
Shaunl.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
