With the ever changing rules and regulations of taxation, it is hard to keep track and maintain the level of understanding, especially if you are not a specialist.
The purpose of this report was to identify how the income generated through employment and self-employment would have an effect on the computation of income tax. The information gathered was to assist members of the C family with improving their understanding on tax, so they could apply the knowledge gained to their respective incomes.
Based on the information given about individual family members, it is assumed that they have no prior or little knowledge of taxation. This report will cover basis periods and all its elements; submission of self-assessment forms and the penalties for noncompliance. It will identify the different methods of renting a property and the expense claimable. And finally a detailed computation of income tax payable where benefits in kind are available, also a calculation of NICs.
Information was gathered from academic books, formed legislations and websites. This was supplemented with the guidance of Her Majesty’s Revenue and Customs (HMRC) via telephone and online. Although there are vast amount of information available on the topics raised by the individual family members, material confinement was the limitation factor. Whilst this imposes on the boarding of possibilities, a strict adherence to the guidelines was approached.
The issue presented by the family was addressed through written letters, with clear outlines, and attached notes (a copy of these letters are imbedded in this report). This format was chosen to maintain a more a user friendly guide.
Subject: Taxable Treatment from Property Income
I am writing to guide you on the relevant information for the taxable treatment on all types of property income. The current tax year is April 6th 2012- April 5th 2013; this is the period in which income is taxed.
In your case income from property consists of: rent and lease premiums (if the length does not exceed 50 years). “Income from more than one property should not necessary be calculated individually” (Melville, 2012). They should be grouped together and deduct the total expenses to give a single profit or loss figure for that tax year.
Before calculating tax you should deduct expenses incurred from renting, these are called allowable expenses1. These expenses has to be “wholly and exclusively” for the purpose of a property business. This includes:
Repairs and maintenance to the property (excluding replacements).
Property Insurance and contents.
Services provided to tenants.
Administrative and managements cost (which includes irrecoverable rent).
Council tax (this is the legal responsibility of the occupier not owner) and water rates.
Interest paid on a loan to buy or improve the property.
Furnished residential properties cannot claim capital allowances2 on furnishings or fixtures within the property. Instead a claimable deduction can be made for either a 10% wear and tear allowance or the cost of replacing a particular item, but not the cost of the original purchase.
Capital expenditure3 is normally not deductible but there are tax relieves on certain types of expenditure called capital allowances. Furniture and equipment provided for residential letting, you can either claim:
10% ‘wear and tear allowance’ of the net4 rent
Or cost of replacing furniture and equipment.
You have to choose one of the two, so I would advise that you calculate the one that’s more beneficial as you cannot switch between them.
When calculating property income certain energy saving capital expenditure (e.g. loft installation) can be deducted, this is known as “landlord’s