The trend of HMO or multi-let properties has grown exponentially in recent years. People are searching for high-standard properties in suitable locations. Besides, landlords can get a handsome yield by letting their property into multiple parts. As a result, landlords are shifting from traditional single let to multi-lets or HMOs for long-term property investment. However, if you are a property owner or willing to invest in HMOs, you should be aware of accountancy and tax for HMO landlords. This will help you to get maximum benefits from the reliefs and to save your taxes.
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What are Multi Lets and HMOs?
If your property is let out to more than one tenant (a student, professional, bachelor), that property would be called multi-let. A multi-let and HMO HMOs (House in multiple occupations) differ based on the number of rooms, stories, buildings, and tenants. Generally, local authorities do not have the proper license for lettings, but HMO owners need a proper license.
The owners of HMO properties should abide by government regulations for the tenants’ protection. You should remember that not having an HMO license is an offense and is subject to punishment.
Benefits of investing in Multi-Lets and HMOs:
HMOs and multi-letting investments generate more rental income than traditional single-letting. Through this process, you can increase your gross rental yields by 12%-15% and some landlords may boost up to 20% plus. You should note that by single-let property you can only receive 5%-7% of the rental yields.
If you are willing to get enough profit through HMO to replace the income of your regular job, you can achieve your goal by utilizing 2 to 3 HMOs. People having 2 – 3 HMOs are financially stable than the single let property owners with 30 0r 40 properties. HMOs are easily manageable too. The setback of the HMO is that you are not able to achieve as much capital gains as a non-HMO property.
However, you should note that high profits lead to high taxes. Therefore, it is advisable to get the help of an accountant.
Accountancy and Tax for HMO landlords:
You need to keep proper accounting records for the tax implications on your HMO properties. Here are some common aspects that are affected by HMOs:
Assessment of the income:
The default method of property businesses run by individuals or partners is cash basis with an annual income below £150,000. Companies having a rental income and expenditures will be considered trading income and the same rules of trading income applies to HMOs and multi-lets.
Cost on Renovation:
HMOs and multi-lets need renovation from time to time for their maintenance. You may also spend money to maintain the standard of the locality. These all expenses would be classified as revenue costs and qualify for deductions in the corporation or income tax. Capital items are easily identified for capital gains tax purposes like adding extensions, building annex, etc.
Repair is considered a revenue cost as it is a day-to-day expense that is necessary for maintenance. However, if the repair is not a regular repair or equivalent replacement, it’d be considered capital expenditures.
According to HMRC, if the improvement changes the character of the things, it’d be classified as capital improvement not repair.
For the evidence of your expense details to HMRC, you should have records of goods, expenditures and receipts. To be secure beforehand, you should take photographs while any work is carried out and save it, ask the tradesmen to provide a breakdown on their invoices and keep a copy of the property survey report.
You can claim plant and machinery capital allowance on multi-lets and HMOs. You can ask for tax deductions qualifying for communal areas of HMOs or multi-lets. The amount spent on communal areas assets is considered the expense of your business. You should note that the allowance for the kitchen and bathroom is no longer available by HMRC.
However, you can avail capital allowance on electrical systems, plumbing systems, hallways and basements, lighting, and lifts in common areas such corridors, etc. Though it’d not be viable for small-scale HMOs, large-scale HMOs can avail a sustainable amount by claiming allowance on these items.
Whilst claiming capital allowance, if you suffer a rental loss, you can offset the loss against non-property income. This will lead to generous tax payments. Moreover, you can also carry forward the rental loss to offset the future rental profit.
Unable to claim capital allowance on HMOs, get in touch for help!
Mixing HMOs and Muti-lets with Single-let properties:
If you are running a property rental business, your business would be considered a single entity for tax purposes. In case of tax loss of current or previous years, you can use it to reduce the tax bill on HMOs and multi-lets.
As a large property business owner, you can reduce your losses through building HMOs and multi-lets by generating tax-free income.
Additional Cost on HMOs and Multi-lets:
HMO landlords can compensate utilities, broadband and council tax with the rents received from their tenants. They should identify and report all the taxes within the investor tax return. However, any extra charges are income tax are deductibles, if they’re wholly and exclusively as a part of the property rental business.
How we can Help?
Now you have understood the need for accountancy and tax for HMO landlords. After reading this blog, if you’re willing to invest in HMO property, we can assist you to model and decide the best ownership approach to get the maximum return from your investment. Besides, if you want to convert your ownership status, we’ll help you with the tax implications, benefits, and risk associated with it.
If you own HMO properties, it might be challenging for you to manage rent payments, expenses, taxes, and other financial responsibilities. We will help you on daily basis. Our team of accountants will manage your taxes, file the tax returns and deal with HMRC on your behalf. Luckily, our package starts with only £30 monthly for single property owners. If you have more than one property, visit packages for landlords to find out the charges.
You can get access to our chartered accountants in London for tax and business advice to reach your business goals.
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Disclaimer: This blog provides general information on Accountancy and Tax for HMO landlords.