Charging for your own labour

Hi Andrew

You accountants advice is correct, as are your conclusion, i.e. it's a pointless exercise to charge yourself.

Let's look at this another way.

My car needs cleaning.

I could drive it to my local Tesco where they have a great valletting service, pay them £8 and allow say £2 for fuel to get there and back. This comes out of my taxable income.

Alternatively I can clean the car myself.

I could of course take the £10 I would have spent out of my right pocket and put it in my left pocket. I'd be no better off though would I?

I could also set up a complicated structure which might convince me that there is a better way but that structure would cost money to set up and administer so the reality is that I would end up paying more that the tenner.
.

I agree with Mark, invoicing yourself sounds like a stickier wicket than the 5th day of the 3rd ashes test!

If you are a sole trader your profit is your taxable income otherwise you end up with 2 taxable incomes eg your own invoice and the profit.

There are however plenty of other reasons to set up a limited company as a vehicle to hold your investment properties, especially if a good proportion of your activities qualify as "trading", involving buying, renovating and selling like a small developer, rather than as "investment" purely for rental income. The tax treatment of property investment income and capital gains is generally punitive and little better inside a limited company than as part of your personal tax affairs, but the longer you keep your properties, the more you add value to them independently of rental income, and the more you aim to draw an income from your properties via company dividends in retirement, the better a limited company becomes. There's also the lovely advantage of being able to reclaim VAT on all your activities, provided your zero-rated or reduced-rate development activities are more than 50% of your turnover, which turns your rental expenditure into "de minimus" and therefore available for a VAT reclaim.

It's too wide-ranging an area to go into here, but I recommend Carl Bayley's Using a Property Company to Save Tax, from Tax Café, as a readable guide.

If you pay yourself then the income would be subject to income tax as if it was earned income, hence your accountant's response.

I understand your point though that the costs should be factored in for your own information. Keep a record of what you do so that you can evaluate your portfolio.Unfortunately it cannot be set off against CGT either. Renovations are not tax deductible in any case so there is no advantage in paying someone else either.

Reply to the comment left by "Puzzler " at "05/08/2013 - 18:05":

Hi - confused about your last sentence - I have been renovating property for approaching 40 years both within a limited company and in my own name. My understanding is that capital items are set off against final sale profits either corporation tax or CGT and repairs are offset against the yearly profits. Have I misunderstood your comment.

Regards

Bob Grant - Chartered Building Surveyor.

i do much the same, i carry out as much of the works to my properties as i can, to me it makes sense to do it myself than to pay someone to do it, plus i enjoy doing it. but it makes no sense to charge your labour to yourself.

Reply to the comment left by "Robert Grant" at "05/08/2013 - 18:43":

I agree with your understanding.

Reply to the comment left by "andrew townshend" at "05/08/2013 - 18:47":

i work in partnership with my brother so charging labour helps to make things fairer, also the comparison I would make is if 2 people each purchased a house for £50,000,one paid for tradesman to do the work at a cost of say 25,000 and the other did it himself at a cost of £5,000 when the properties were sold for £100,000 ,one would be liable to ggt on £25,000 and the other on £45,000 and if you work for free how can you value your properties at their true cost
also as a landlord the return is what matters, and whilst the person doing all the work himself can claim to be getting a higher rental yield,thats not a true reflection of the situation.however having said all that the comments left and for which I;m very grateful have left me thinking it may be easier not to bother

Reply to the comment left by "Robert Grant" at "05/08/2013 - 18:43":

You are correct as far it goes - however "improvements" are not deductible.

Capital items in rental residential property generally do not qualify although there are some exceptions; repairs are also deducted as you say, provided they are like-for-like e.g.broken windows. If they add value then they are not deductible. A very grey area between if you ask me but those are the rules. So as an extreme case if you were to build an extension then that would not be deductible.

I think the theory is that the taxman does not fund any increase in value to your property.

If you do your own tax return be very careful. An accountant will know which can be deducted.

Here is the HMRC page which outlines the rules but it is as clear as mud in some places!:

http://www.hmrc.gov.uk/capital-allowances/buildings.htm

as you can see specifically excludes rental property in most cases.

This page actually makes it much clearer:

http://www.hmrc.gov.uk/manuals/pimmanual/PIM3005.htm