Self employment and Buy to Let Refurbishment

[Magsmum]

Hi this is my first post to the forum and I would appreciate any views on the following:

My husband and I jointly own 4 buy to let properties. I submit our annual tax returns and keep accounts of all income and expenses and tenancies using Landlords Property Manager software.

My husband retired last year at 55 and has a pension on which he pays tax. Since he retired we have purchased a property which requires a total refurbishment which he is undertaking himself with advice and relevant help from registered tradesmen. In order to do this he has had to invest in various expensive tools and items which cannot easily be incorporated into landlord software as legitimate revenue costs.

In addition to this I am concerned that the true capital cost (value) of the refurbishment in terms of his working time is not recorded or invoiced to the rental business as a legitimate capital cost of the property refurbishment. It is therefore not visible on the Landlord Management Software accounts as an allowable deduction against capital gains tax when we eventually come to sell the property. If we were paying tradesmen to do this we would have invoices to offset some capital gain.

I am now wondering whether it would benefit my husband to register as self employed for the purposes of buying tools, possibly a small second hand van, and being able to invoice the rental business for his working time spent on this property and on maintaining the other 3 properties which we self manage. Could he offset any yearly losses of this potential self employment against the income tax which is currently deducted from his pension? Would a sole trader handyman business be able to invoice and receive payment from his own rental business or would the tax man object to this?

I don't know whether this would complicate what is essentially a straightforward self managed rental business, or whether it would provide us with a better tax strategy. This is my first post and any advice from the forum would be greatly appreciated.

Magsmum.

[robbob]

I don't know whether this would complicate what is essentially a straightforward self managed rental business

Yes is this answer to this question.

Note no claim can be made for notional time spent,claims are made for actual costs incurred that relate to the business.

I am now wondering whether it would benefit my husband to register as self employed for the purposes of buying tools, possibly a small second hand van, and being able to invoice the rental business for his working time spent on this property and on maintaining the other 3 properties which we self manage

Generally speaking the expenses (van , tools etc)would have the same business use and very similar if not identical tax deductability against the rental income as would happen if he was a self employed/ltd co trader with income that included this work. This being the case there would normally likely be no advantage going down this route.

In order to do this he has had to invest in various expensive tools and items which cannot easily be incorporated into landlord software as legitimate revenue costs.

I am not a great fan of trusting software to come up with correct figures to enter onto a tax return, normally what they chuck out as results will depend on what is inputed into it - if you are relying on this software to make most of the calculations it may be worth getting a periodic health-check of the figures by someone who knows rental property matters well. Apologies if you know exactly what you are doing

[Magsmum]

Hi Robbob,

Thanks for your prompt and helpful comments. I have read and understood your comments but would like some clarification on a couple of points.

1. As my husband receives a taxable pension, and is now doing unpaid work for our business, I wondered whether becoming self employed but incurring a business loss would be deductible from the tax liability on his pension, thereby giving him some tax benefit. I know that rental losses can only be carried forward to set against rental income liability in future tax years, and cannot be offset against current pension or earned income (such as a loss from self employment could be). Is this correct?

2. The capital gains liability issue is also still niggling me. Payment to tradesmen for labour when refurbishing the property is an allowable charge against capital gains because it is a demonstrable cost, but if he improves the value of the property through his own labour there is no monetary value attached, and therefore a larger capital gain is made. I understand that only the actual costs incurred can be claimed, but this is where I thought it may be of benefit to be able to put a value on his time, and invoice the rental business as a self employed tradesman. He would then obviously have to declare this as income from self employment, but could this not have a double benefit of reducing the capital gains tax liability, and perhaps also reduce income tax liability as in point 1 above?

If all the above is nonsense and there is no benefit to be gained, it seems from your reply that we could simply charge the tools and equipment etc to the property business. Would this be treated as capital expenditure or be allowable revenue expense?

Many thanks for your help

Magsmum

[mullet]

A fundamental principle of taxation is that a person cannot pay themselves for something (and declare such income) and claim a deduction for that cost. So your husband cannot charge his labour against the rental business if he is acting as an individual. If he was working through a limited company that would be another matter, but it would introduce a layer of complication - and additional reporting/return burdens.

You are bothered that you cannot claim a deduction for your husband's labour, but that you would be able to claim if you used a third party. But remember that you have to pay out the full amount to that third party in order to get 18% or 28% relief. Look at it with some made-up figures:

Gain with your husband's labour - £80,000
CGT at 28% £22,400
You have £57,600 in your pocket

Gain - £80,000
Labour - £30,000
Net gain - £50,000
CGT at 28% £14,000
You have £36,000 in your pocket

Another point - if your husband made a loss in his "business" of providing labour, then that loss would not automatically be available to set against other income. If HMRC believe there to be no hope of profit (if the business is not conducted on a commercial basis and with a view to the realisation of profits) then they can use legislation to restrict losses by only allowing them to be carried forward to be used against future profits of the same business.

[Magsmum]

Dear Mullet
I am very grateful for your reply. I understand exactly what you are saying and the illustration was very helpful to get things straight in my head! I'm so glad I posted the question here so I can now put it out of my mind

Many thanks to both forum members who replied to me

Magsmum