FHL, AIA and tax return completion - its complicated!

[Mel B]

Hi all

I hope you good people are able to help me - I've browsed your great forum and thought I'd register so I can say hi and ask for some advice too! Whilst I’m quite happy to go to an accountant I like to get things clear in my own head first so I understand what I’m talking about and make sure I don’t forget something important!

Background:
Jointly with my husband I have a rental property which we’ve had for 10 years and will continue to own; we have an interest only mortgage on our own home which was used to purchase it (fully traceable back to the purchase of the rental property); we are equal owners in the property so the expenses and income is split 50/50 when we do our own self-assessment tax returns (SARs) which we’ve done since we first bought it so I'm pretty much up to speed regarding this type of property.

In addition I have recently bought two new build furnished holiday bungalows on a licenced site (not static caravans) which the site is managing fully and paying a guaranteed minimum return per month (after deduction of their costs/fees) and the only expenses I’ll have to pay will be utility and insurance costs (yes ... I've done the maths and checked it all out fully before committing to them as I know the 'promises' made by some companies promoting this type of thing are plucked out of thin air!). I have been reading and researching about the tax etc implications/requirements so think I’ve got a grasp of how it works as it’s quite different to a standard rental property (and here was me thinking buying an FHL would be easy-peasy!!!). However it’s even more complicated than that!

Lodge 1:
This is in owned outright by me, in my name, so I believe, in addition to the allowable expenses (insurance, utilities) I can claim the Annual Investment Allowance (AIA) for the cost of some fixtures/fittings etc (I know I need to get agreed details from the site as to what proportion of the purchase price they represent, eg 10%, 25% etc and this is the figure to use for the AIA), and that this allowance is show in full the first year and then the outstanding ‘loss’ is carried forward each year until it is gone, ie I am showing an annual profit so that would be applicable to Lodge 1. Have I got this right?

Lodge 2:
For this I’ve made a ‘partial payment’ of 30% with some of the remaining ‘debt’ being paid off with the income that I would normally have receive from the lettings (after fees etc) which will reduce the outstanding 70% balance by around 10% to 60%. The outstanding ‘debt’ will then be a paid off totally in 16 months‘ time at which point the income will then come to me - during the 16 month interim period though I won’t actually ‘receive’ the income at all.

How I should proceed with a return for Lodge 2 is what I’m really not sure about! Although I won’t earn enough now to pay tax anyway as I’ll be ‘earning’ below my personal allowance I don’t want to do anything wrong now and cause problems for the future, so thought I’d try to get to grips with it now.

QUESTIONS:

When should I include Lodge 2 in my returns?

Should I include it my 2016/17 return (5 months) and onwards even though I won’t be getting any ‘actual’ income myself now, but I WILL have expenses (ie insurance and utilities)?

If I need to include it from now, should I:

• include 100% of the AIA for the eligible items from 2016/17 onwards along with the expenses incurred
OR
• only include 30% of the AIA for the eligible items )as I have only paid for a 30% ‘share’ of the property) starting from my 2016/17 return and then add in the remaining 70% of the AIA when I own the lodge totally?

If I don’t need to include lodge 2 in my returns until I own it outright (ie from 2018/19), would I be able to include 100% of the AIA starting then? Also, what would I do about the expenses I’ll be incurring for it in the interim period (ie insurance and utilities)?

Completion of Tax Returns:

Sole Trader:
On the self-assessment return I note that there is a separate section for FHLs which I would need to complete each year but I believe I wouldn’t need to do any other returns as I would be classed as a ‘sole trader’ and my SAR would be sufficient. Am I right about this?

Partnership:
If I wish my husband to have an interest in the FHL lodges and receive a proportion of the income from the FHLs (now or in the future) it appears that I will I need to set up a ‘partnership’ company with him and then complete a partnership return in addition to our individual SARs – is this correct?

I've also been reading up about Entrepreneur's Relief etc for when I come to sell but that would be a long way off so I'm not 'worrying' about it at this moment in time!

Thanks in advance for taking the time to read my post and hopefully being able to answer my queries!

Mel

[bd6759]

When should I include Lodge 2 in my returns?

You need to include the income. You are recieving it, its just that you are using it to pay for the property. You prepare the accounts as normal claiming any expenses or allowances.

Completion of Tax Returns:

I dont understand your first point. FHL gets entered in the FHL section of the property pages. Unless you have a separate self employment, you won't need those pages.

Joint letting of property is rarely considered to be a partnership. If your husband acquires an interest in the properties you simply apportion the income and expenses and you enter your own share in the FHL section of each of your returns.

At the moment FHL qualifies for ER.

[Mel B]

Thanks 'bd' I am aware of the FHL pages in my own personal SA return but wasn't sure if I also needed to do a separate return as well to cover the 'business' as it were,so just doing my own personal return and including the FHL on that is the way to go.

I'm aware of the splitting of income regarding a 'standard' type of rental property being 50/50 as we have equal ownership of the bungalow (ie both names on the deeds), but wasn't sure on the FHL side for the Lodges as it appears it is classed as 'a business' and subject to different rules especially about the proportion of income each 'partner' gets, hence the question ref a partnership requirement and then the need to do a 'partnership/business' return separately.

[bd6759]

It is not a business, but for many tax purposes it is treated as if it were a business. The normal 50/50 rule does not apply. You can apportion the income as you see fit, with the proviso that an apportionment cannot be retrospective.

[Mel B]

Thanks again bd just a couple of further queries just to be certain I'm doing things 'right':

Should I change the ownership of the 2 lodges from just me to joint with my husband so that I can apportion the income between us to reduce my individual tax burden?
If so, would our individual SA returns be sufficient or would I then have to do one for the 'partnership/business' or whatever it is called as well?

[bd6759]

If you both own the property, you are both entitled to the income. It is up to you to decide how to apportion it.

You will each need a SA tax return, with the FHL section of the property pages completed. You each show your share of the income and expenses. No other return is needed.

[Mel B]

Many thanks bd, that's one less 'return' to worry about! I'll arrange to have the lodges put in both our names with the site so no problems apportioning the income to minimise tax!

I already have a spreadsheet for the income/expenses for the rental bungalow we've got so have amended it to included a section for the lodges too - once I put in the relevant expense/income details into it, it will 'magically' work it all out for me so I just have to transfer the figures in the 'boxes' on the SA returns ... took a bit of work to get the spreadsheet right though!

Again, many thanks for your help with all of this.

Mel