Accounting Guide for New Landlords

When you become a landlord for the first time, there are a lot of things you will need to be aware of. From tax considerations, and regularly changing regulations to ensuring the property is suitable for tenants. Here is our guide for new landlords.

Have the correct licenses

If you are a landlord,  you may need to have an HMO (house of multiple occupations) license. HMO licensing started in 2006 as a result of the Housing Act of 2004 and is to ensure the property is suitable for renting. The license is to ensure there are standards held for heating requirements, kitchens, washing facilities, and more. HMO licenses are necessary if:

• At least three tenants live there, forming more than one household
• You share toilet, bathroom, or kitchen facilities with other tenants

A household is classed as either a single person or members of the same family who are married, living together as a couple or are related.

Even if the property doesn’t meet the mandatory requirements described above, an HMO license may still need to be obtained if the property is located in certain areas. This is why it is imperative to always check.

Get Landlord Insurance

Whilst this is not a legal requirement, landlord insurance policies can help provide peace of mind to the landlord and will ensure the property is protected if anything were to happen. It may also be a requirement if you need a mortgage to purchase the property.

Keep good financial records

Landlords need to keep financial records for a minimum of five years after the tax return deadline each tax year. Keeping your records organised and easy to access will help make your life a lot easier, especially if HMRC ends up questioning anything and you struggle to find the necessary information.

If you own more than one property, keeping the financial records for each property separate is the best method as it will improve transparency and make calculating taxes and income a much simpler process. If you do not separate them, it will make self-assessment more time-consuming and painful.

Are you a limited company?

If you have set up your landlord business as a limited company, you will need to keep rent payments, receipts for purchases made for the property, invoices for any work carried out on the property, and copies of bank statements to back up all the income and outgoings.

Track rental income and Outgoings

Tracking rental income is essential, as it is important to know exactly what money the property is bringing in and how much upkeep is costing, as it will help determine whether the property is making a profit or a loss. This in turn will help determine the viability of the investment.

All rental income needs to be declared to the HMRC on a self-assessment tax return. If the information is not correct, penalty charges will be issued. HMRC will use letting agents, electoral roll, and land registry information to identify which property you live in and which additional properties you own.

For the most accurate record keeping, landlords should keep track of the following

• Rental income
• Regular costs/overheads such as utility bills
• Maintenance costs
• Legal fees
• Safety inspection costs such as boiler checks

Keep track of rental and business expenses

There are several expenses landlords will have to pay out such as

• Letting agents fees if you have used them
• Accounting software fees
• Council tax
• Utility bills
• Accounting fees
• Insurance fees
• Landlord insurance
• Unexpected maintenance or repair costs

Certain business expenses could potentially be tax deductibles such as advertising or travel expenses.

If a cost is an “expense incurred wholly and exclusively for the property business”, this can be tax deductible. It is important to note that the tax rules for landlords can change regularly so it is important to stay up to date with the changes and ask your accountant if you are concerned about anything.

Create a profit and loss statement

The aim of landlords is to make a profit through renting their property. Creating a profit and loss statement enables you to understand whether you are actually making a profit.

The statement combines your income and your expenses to conveniently show whether you are bringing in more than you are spending. This will highlight any areas that are not making you money, will indicate when you need to increase rent, and help you understand which areas you need to cut down on costs if possible.

Use accounting software

Accounting software can save you a lot of time and effort. It will store all the information you need, create reports for you to quickly understand how your rented properties are performing, keep track of receipts, and help make completing your tax return a lot easier.

Whilst there are general accounting software tools available that can be applied to any business, there are also some that specialise in landlords. It is important to find the accounting software that you find easy to use and is the best fit for your needs.

Becoming a landlord can seem overwhelming, with a lot to consider and changes being made quickly and regularly. However, we hope our guide for new landlords will help you get started. Your accountant will be able to advise you on any tax regulations that you need to be aware of and will provide advice wherever possible.