Buying or owning property for rental is popular in the UK.
Research from early 2022 suggests buy-to-let mortgages continue to boom, despite changes in taxation that it was thought might drive people away.
Good financial record keeping for landlords needs to be at the centre of any property rental planning.
In this article, we examine what landlords need to know about accounting and bookkeeping, so you can be sure to stay on the right side of the law—while maximising income.
Here’s what we cover:
- Landlords and taxes—the reason for financial records
- What kind of landlord am I?
- Why do landlords need to keep financial records?
- What is Making Tax Digital for Income Tax and how does it affect landlords?
- What records should landlords keep and for how long?
- Where should landlords keep financial records?
- 5 top tips on keeping good financial records
- Final thoughts on landlords keeping financial records
Landlords and taxes—the reason for financial records
If you get rental income from privately owned property then two things are true:
- You’re a landlord (even if you don’t think of yourself as one).
- It’s very likely you have to pay income tax on the rents you receive.
This is a key reason why you need to keep good financial records.
HMRC has suggested 700,000 landlords either don’t pay tax, or don’t pay enough. It has even created the Let Property Campaign as a form of amnesty so landlords can come clean and pay up.
Tax also needs to be paid on additional payments you receive for the use of furniture, or any services you provide, such as heating, repairs, and cleaning of communal areas such as hallways.
But the good news is that you can deduct expenses and allowances from the income.
What you’re left with is the profit upon which you pay income tax.
(Note that you can’t claim expenses if you’re claiming the tax-free property income allowance when your rental income is less than £1,000.)
Most private landlords use the Self Assessment system to calculate and then pay their taxes, and there are special boxes on the Self Assessment tax return that relate solely to property income, expenses that relate to the income, and exemptions.
If you complete a paper-based return, these boxes are included on the SA105 form, which should be submitted as a supplement to your Self Assessment tax return (SA100).
What kind of landlord am I?
Most small landlords within the UK are private individuals who use Self Assessment to declare and pay income tax due on rental income—and that’s what we focus on here.
But let’s briefly look at the different kinds of landlords that exist when it comes to taxation:
- Resident landlords: Those letting a room in their own home might be able to use the Rent a Room scheme. This means the first £7,500 of rental income is exempt from tax (£3,750 if you jointly own the property). If the room(s) you let are bed and breakfast, or you’re operating a guest house from your home, then this is considered a trade and not rental income.
- Furnished holiday lettings (FHL): There are special tax rules for FHL such as being able to claim Capital Gains Tax relief for traders, being able to count profits as earnings for pension purposes, and considering items such as furniture, equipment, and fixtures as plant and machinery for capital allowance purposes.
- Professional landlords: Those who privately own and rent properties as a full-time occupation are considered to be operating a trade. This means they not only pay tax but also National Insurance contributions. A professional landlord is typically defined by the fact being a landlord is a person’s main job. They will also own multiple properties and typically are actively looking for more.
- Limited company: Incorporating a company and putting your properties into it is becoming increasingly popular for semi-professional landlords. This means corporation tax becomes due, rather than income tax, and this can be more tax efficient. The individual receives income by optionally taking dividends from the company.
Why do landlords need to keep financial records?
For smaller landlords, it might seem ridiculous to keep financial records. After all, it’s a very predictable income.
You receive a set amount each month, that you mention on the Self Assessment return in January each year.
Why is record keeping for landlords even required?
There’s a handful of very good reasons, as follows:
- The government requires you do so. As mentioned above, it’s all about tax. We explain exactly what you need to keep below, and for how long, but this is a basic part of the Self Assessment rules.
- Working out your expenses. You might be spending the odd bit of cash here or there paying for things such as a new fridge for your tenants, or minor repairs. You might consider these inconsequential to the point where you don’t even make a note. But they can add up and can reduce your tax bill.
- Accurately claiming tax relief. This allows private landlords to potentially claim relief on finance costs at the basic rate of income tax (20%). Depending on your personal circumstances and the amount of your expenses, this can reduce the amount of tax you pay.
There are other miscellaneous other reasons why good record keeping for landlords is vital, such as it being a requirement if you intend to purchase more properties in the future.
For a buy-to-let mortgage, lenders will want to see how effective your existing rental business has been, and how well you’ve managed the property.
And depending on what kind of accounting method you use (cash accounting vs traditional accounting), you might be able to bring losses forward across tax years.
Again, you will need good accounting records to be able to do this.
What is Making Tax Digital for Income Tax and how does it affect landlords?
Perhaps the biggest reason for good financial record keeping for landlords is the impending introduction of Making Tax Digital (MTD) for Income Tax Self Assessment (also known as MTD for Income Tax, or MTD for ITSA).
MTD for Income Tax starts as of April 2024, so affects the 2024/25 tax year.
For landlords earning over £10,000 from rental income (or a combination of sole trader and rental income), this will mean the following:
Digital record keeping
Software must be used to keep accounting records relating to sole trader and landlord income that you declare as income tax.
For example, data from invoices you send or receive must be stored digitally.
Additional landlord-specific accounting data may need to be stored digitally too, but details have yet to be released by HMRC.
Updates and reports
You’ll need to make at least quarterly updates to HMRC.
Depending on the software you use, these will be largely automated, so shouldn’t be too difficult. You’ll also need to provide an end of period statement (EOPS) by 31 January each year for your rental income (plus individual EOPS for any other trades you might operate).
By 31 January each year, you’ll also need to provide a single final declaration for all your income.
All must be provided via MTD compatible software.
If your rental income (or combination of sole trader and rental income) is £10,000 or below then you’ll continue using Self Assessment.
Depending on your circumstances, you may need to keep using Self Assessment alongside MTD for Income Tax if you have to declare income from savings, investments or pensions, for example.
What records should landlords keep and for how long?
HMRC currently requires you keep details of the following as part of the Self Assessment rules:
- Dates when you let your property. This will be listed on any tenancy/lease agreements that you should be keeping anyway.
- Rental income you receive, including rent books, receipts, invoices and bank statements relating to this. Remember that weekly rents always require a rent book, but a tenant can request one in any event—and the law says you must comply.
- Income from services you provide to your tenants, such as if you charge them for repairs.
- Allowable expenses you wish to claim and that you pay in order to run the property. This could include receipts or invoices, for example. It could also include non-property-specific things such as mileage that you claim while carrying out your property business work.
Where should landlords keep financial records?
Until the introduction of MTD for Income Tax in April 2024, which legally requires you keep digital records if income is above £10,000, you can keep records on paper or using software.
Whatever you choose, the records must be accurate and legible. HMRC can impose a penalty if this isn’t the case.
In other words, you should always assume a third party will view your financial records.
If using a computer, you can use spreadsheets or dedicated accounting software.
Once MTD for Income Tax is introduced in April 2024, you must use software for accounting relating to income tax.
This could be a spreadsheet but you’ll need to use an add-on called bridging software that communicates with HMRC in order to submit the periodic updates, EOPS and final declaration.
Because this can be something of a messy solution, most landlords will use accounting software.
HMRC says two million small businesses, landlords and the self-employed who are expected to start using MTD for Income Tax already use software.
How long should landlords keep financial records?
Private landlords must follow the rules of Self Assessment, which state that records must be kept for at least 22 months after the end of the tax year.
In other words, for the 2022/23 tax year that ends in on 5 April 2023, you’ll need to keep the records until the end of January 2025.
However, if you miss a tax submission deadline then you’ve got to keep the records for slightly longer—at least 15 months after you eventually send the tax return.
In other words, if you miss the 31 January 2024 deadline for the 2022/23 Self Assessment tax return, and submit it in February 2024 instead, then you’d need to keep the records until the end of May 2025.
5 top tips on keeping good financial records
Here are five tips to help you keep good financial records if you’re a landlord.
Providing expert input is James Wood, Policy Manager for the National Residential Landlords Association (NRLA).
1. Use software and apps
A key trick to happy landlord financial record keeping is to ensure the vital data, such as money spent or received, is transferred into your accounting system as soon as possible.
“Anything that you can do to make sure that your record-keeping is up to date is always going to be a bonus,” says James.
“The vast majority of landlords do this in addition to their other work.
“So, anything like apps that can save time and allow you to accurately record details is going to be an improvement.”
Nowadays, you can get apps for your phone or laptop that make this a cinch—everything from automatically reconciling bank payments, to scanning in the details from receipts and invoices by simply taking a picture of them.
Why make life harder for yourself by recording everything on paper, or by trudging through spreadsheets?
2. Work to a monthly schedule
Most rents are paid monthly, and you’re probably already used to checking the bank account around that time.
Why not use the opportunity to take care of bookkeeping/accounting tasks at that time, too?
“Landlords need to be keeping records of both their rental income and any times where the rent has not been paid,” says James.
“That can all go into a singular rent statement. It makes sense to record any outgoing expenses at this time, too.”
In other words, doing a little bit at a time means you can keep on top of it—and you also get the satisfaction of sleeping at night knowing everything is running smoothly.
Don’t let all this important data linger as a pile of paperwork that you hate tackling each January.
Doing a little at a time also helps avoid errors that creep in if you tackle a mountain of paperwork all at once.
3. Get confirmation from tenants
“When a tenancy begins, you’re required to provide a significant amount of paperwork,” says James.
This includes the tenancy agreement, of course, but also things such as mandatory safety certificates that must be handed over to tenants.
It’s about ensuring compliance with legal requirements.
“The most important thing in being a good landlord is knowing what the regulations are, and showing that you’ve complied with them,” continues James.
“A good idea is to use a checklist that tenants sign, to show you’ve complied with everything.
“If you don’t get evidence then later on you may have to serve the paperwork again to the tenant, which increases your workload.”
4. Get expert help
“Tax can be an extremely complex area,” says James.
“A lot of the time it depends on specifics of your property and your personal situation as to what you write on the Self Assessment form.”
There are accountants and tax advisers who are experts in property rental. Examples of those the National Residential Landlords Association (NRLA) suggests its members consult include Rita 4 Rent, Tax Scouts, and Less Tax 4 Landlords.
As well as being able to simply hand off your accounting, tax experts such as these are also likely to be full of wisdom built up over years.
Sharing it with you is simply part of their job.
Thinking of expanding your portfolio, for example? They’ll know the best way to be tax-efficient, and how to make life easier when it comes to accounting.
“The best advice for anybody starting out is to ensure you’re aware of your role and requirements,” says James.
“There’s a huge amount of regulations to follow and understand. Ignorance of the law is no excuse.
“A big hidden cost can be enforcement action against you—from HMRC, your local council, and others. It can be difficult without specialist support through organisations like the NRLA.”
5. Switch to cash basis accounting
This is the default accounting method for new landlords since 2017, but if you’ve owned rental property for longer then you might’ve been forced to use accrual (traditional) accounting.
Cash basis offers a number of advantages for landlords, perhaps the biggest of which is simplicity.
Switching from accrual to cash basis accounting is straightforward, and involves a handful of adjustments.
Final thoughts on landlords keeping financial records
Some might be surprised to learn that accounting for landlords is more sophisticated than it might sound. There are certainly more obligations than it might seem at first glance.
Add in compliance issues like safety checks and a lot of paperwork can start flying around.
However, keeping on top of things isn’t very difficult and using software is a must if you want to make things as fuss-free as possible.
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