Tax implications of letting residential properties

With all the changes of this year, you might be considering whether letting property could supplement your income or pension.

Of course, HMRC considers profit from property as income so landlords need to be on top of any recent changes to avoid falling foul of new rules, and to know what’s potentially coming down the line.

Read on to find out what the tax implications are of some popular options, and don’t miss what we think is the most overlooked opportunity for property investors.

Renting out a room in your house

• HMRC has a ‘Rent a Room’ scheme which is open to people who are letting out a room in their only or main home.
• To qualify, you’ll need to be a resident landlord but your home does not need to be owned by you, it can be a rental property.
• Those who qualify are entitled to up to £7,500 tax free a year for letting out furnished accommodation in their home. This is halved if you share the income with your partner or someone else.
• If you earn less than £7,500 from letting the room out, the tax exemption is automatic. You don’t need to do anything.
• Those earning more than £7,500 from their rental need to opt into the scheme and claim their allowance via their tax return, or record your income on the property pages of your tax return.
• Replacement of Domestic Items relief is not available in the event of breakages etc of items like fridges or sofas.

Renting out your house and moving to an alternative home

• If the purse strings could do with some greater flexibility, an option could be to rent out your home and either rent or buy a more affordable option.
• ‘Let to Buy’ refers to the process of turning the home you currently own and live in into a rental property to let to tenants, and then buying another property to live in. The original residential mortgage on the first property is converted to a buy-to-let mortgage, the cost of which is covered by the rental income, while you take out a residential mortgage on your new home and pay for it out of your salaries.
• Any rental income you receive may be taxed at your usual rate (20% if you are basic rate taxpayer, and 40% if you are a higher-rate taxpayer).
• You will have to take into account any tax deductions as well as letting agent fees, then see how much you are left with. This net figure would need to cover the mortgage payments on your property, at the very least.
• You could also consider moving into a cheaper rental property. You’ll pay income tax on the rent you receive, as it gets included in self-assessment. There is no tax relief on the rent paid out.

Investing in a second property which will be let as well as used by family

• Perhaps you tried booking an AirBnB as an alternative to an overseas holiday this year, and saw how in demand holiday lettings were and are considering investing in somewhere which can be used by your family as well as bringing in income via commercial lettings.
• If that’s the case, you could consider establishing a ‘Furnished Holiday Let’ (FHL) property.
• Homes that qualify as ‘Furnished Holiday Lets’ are subject to special tax rules for rental income:

1. You can claim Capital Gains Tax reliefs for traders (Business Asset Rollover Relief, Entrepreneurs’ Relief, relief for gifts of business assets and relief for loans to traders).
2. You’re entitled to plant and machinery capital allowances for items such as furniture, equipment and fixtures.
3. The profits count as earnings for pension purposes.

• A UK based, furnished home which is intended to make a profit can be considered a Furnished Holiday Let, so long as you meet 3 conditions:

1. Your property must be available for commercial holiday letting to guests and holiday makers for at least 210 days (30 weeks) per year.
2. If your Furnished Holiday Let is rented out by the same person for more than 31 days, there shouldn’t be more than 155 days ( +22 weeks) of this type of ‘long term’ occupation per year.
3. Your property must be rented out as holiday accommodation to the public for at least 105 days (15 weeks) of the 210 days you have made it available. The time you or your family use the property doesn’t get counted towards this total.

• With a FHL, you can claim capital allowances on fixtures within the property and, should it generate a loss, you can offset that loss against your other income whereas normal rental losses can only be offset against future rental profits.
• Second homes that don’t qualify for FHL can still be considered as ‘buy to let’.
• Unlike FHL properties, with ‘buy to let’ properties you can minimise the tax you have to pay by deducting certain ‘allowable expenses’ from your taxable rental income.
• Mortgage restrictions and capital expenditure gets added to the cost of the property, not a deduction from the rent.
• Looking at the form 17, splitting the beneficial ownership and searching for cheaper mortgage rates are all opportunities open to buy to let landlords.
• Whichever the classification, the income you receive as rent is taxable.

Investing in one or more properties to let out

• Perhaps the events of the past months have given you opportunity to consider adding a property portfolio to your income streams.
• To see whether you would be better holding property personally or through a limited company, see our factsheet.

A number of changes have taken place recently that property owners need to be aware of:

Stamp duty

• The introduction of a ‘stamp duty holiday’ means there is no Stamp Duty Land Tax (SDLT) for properties up to £500,000 bought before 31/03/21.
• If it is a second property, the holiday still applies and only the surcharge is payable.

Capital gains

• If you sell a property that is liable for Capital Gains Tax (CGT), then you have to pay the CGT 30 days from completion and not wait until you complete your tax return.

Income tax

• Introduced from 6 April 2017, higher rate tax relief is restricted for buy-to-let landlords on the costs of finance, such as mortgage interest or interest on loans to buy furnishing.
• It means that all finance costs (not just loan interest) will no longer be an allowable expense when calculating your taxable rental profits.
• Rules only apply to individuals with residential property businesses. They do not apply to companies.

The most overlooked opportunity

• The Form 17 and Trust form

1. They allow a husband and wife or civil partnership to split the income in a different way to how the property is actually owned without affecting ownership.
2. So if a husband and wife owned a property 50/50 but the wife was a 40% higher rate taxpayer, the rental income can be moved to the husband, which would then be liable for 20% in tax.
3. You’ll need to provide evidence that your beneficial interests in the property are unequal, for example a declaration or deed.
4. It is basic tax planning but in our experience most people are not aware of them, so do not have them.

Whichever route you are thinking of, the Blue Rocket team of advisers can help ensure that you are fully aware of all tax implications and that you are set up correctly. Give us a call 01322555442 or drop us a line happytohelp@bluerocketaccounting.com. And while we’re on the subject of contacting experts, if you decide to rent out your house, you must let your mortgage lender and insurance provider know first.

Blue Rocket Accounting are Kent based accountants working with companies in all sectors, including construction, cleaning, retail, consultancy, manufacturing and hospitality to help them expand their horizons and reach for the stars.

The information and data in this article was correct at the time of publishing and every attempt is made to ensure its accuracy. However, it may now be out of date or superseded. Blue Rocket Accounting makes no representation or warranty of any kind regarding the content of this article and accept no responsibility or liability for any decisions made by the reader based on the information and/or data shown here.

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