How Good Is Your Accountant? Essential Questions for Landlords

I highly recommend that all landlords ask their accountant one very simple question. The answer will reveal whether your accountant truly understands the nuances of rental property business accounting or whether they might inadvertently cost you money—or even land you in hot water with HMRC.

The question is this:

Do you keep a balance sheet and capital account for my/our rental property business?

If the answer is YES, that’s an excellent sign.

However, if your accountant tells you this isn’t necessary, it’s cause for concern. Here’s why:

When you come to sell your rental property (or properties), you may need to pay Capital Gains Tax (CGT).

CGT is calculated based on the difference between the sale price of the property and your base costs for CGT calculation purposes, along with costs of sale. This can differ significantly from the simple difference between the sale price and the purchase price. For instance, capital costs—such as Stamp Duty paid at purchase or the costs of capital improvements like lease extensions—can reduce your CGT liability. If your accountant doesn’t maintain a balance sheet for you, the responsibility of tracking these capital costs falls solely on you.

Furthermore, while your mortgage balance doesn’t affect CGT, it can impact your ability to claim the 20% tax credit on finance costs. If your liabilities exceed your base costs across your property portfolio, you could risk losing this entitlement. This is yet another reason why it’s crucial for your accountant to keep a balance sheet that includes a capital account analysis.

I’ve encountered several cases where landlords have either overpaid CGT or over-claimed tax credits on finance costs. Both situations are concerning, but the latter can also result in HMRC penalties and interest. If I were setting the rules for HMRC, I’d suggest additional sections in self-assessment tax returns to make such issues easier to monitor, ensuring that taxpayers are more likely to pay the correct amount.

Another frustration of mine is the number of accountants who fail to determine whether their landlord clients are passive investors in property or operate a property rental business. This distinction is critical, especially when two or more individuals are engaged in business with a view to profit. In such cases, a partnership should be registered with HMRC, and partnership self-assessment returns should be filed. Failing to do so and instead accounting for rental income and expenses on personal self-assessment returns can lead to HMRC penalties and a loss of tax-planning flexibility.

While there’s no specific legislation defining a ‘business,’ case law provides some guidance. These factors indicate whether activities are broadly considered a business:

• Is there a “serious undertaking earnestly pursued” or a “serious occupation”?
• Is there an occupation or function actively pursued with reasonable or recognisable continuity?
• Is there a certain amount of substance in terms of turnover?
• Are the activities conducted regularly and on sound, recognised business principles?
• Are they of a kind commonly undertaken by those seeking to profit?

Many view this definition as ambiguous, but HMRC accepts that it should always apply if an individual spends 20 hours or more per week personally undertaking activities indicative of a business—an interpretation consistent with the case law referenced above.

I hope you’ve found this article helpful. I encourage everyone reading to ask their accountant the following question as a starting point:

Do you keep a balance sheet and capital account for my/our rental property business?

I look forward to reading your comments below!

PS – I scheduled this article last week to be published on Christmas Day. I’m not really writing articles on Christmas Day, but I might well be looking at the comments to see whether anybody else is 🙂 – HAPPY CHRISTMAS!

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