If you are renting your own house or even rooms within the property you live in, it is important to remember that you are classed as a landlord and therefore there are some obligations you may have to adhere to.
If you rent a furnished room in your own home and your income from that rental is lower than £7,500 per year you do not need to pay tax.
Rental income above £7,500 whether in your own home or not must be declared to HM Revenue and Customs (HMRC) on a Self-Assessment tax return, land and property supplementary pages, and it is your responsibility to inform HMRC when you are in receipt of rental income.
All rental property business records should be kept for five years following the 31 January after the tax year, so for the 2021/2022 tax year records should be kept until 31/01/2028.
Claiming tax allowances
Expenses can be claimed to reduce the income tax payable on rents and the general rule is that expenses must be ‘wholly and exclusively’ for the purpose of the rental business. The main types of expense a typical landlord would incur are as follows:
- Repairs and maintenance
- Service charges and ground rent
- Advertising for tenants
- Buildings and contents insurance
- Agent’s fees and commission
- Bills paid by the landlord such as council tax, heat and light and water rates
- Accountancy fees
- Mortgage interest costs (capped to 20% basic rate tax relief)
From April 2020 individual landlords no longer receive relief for mortgage interest payments against residential property rental income in calculating taxable profits. Instead, the mortgage interest payments are generally available as a basic rate tax reducer. This change in mortgage interest relief does not affect residential property held within a company as limited companies are not affected by this rule.
Repairs and maintenance costs are allowable deductions from rental income and will be those costs keeping the rental property in good operating condition, that does not materially add value. In effect the cost is restoring the item to the state it was in before it was damaged. This would include things such as: painting and decorating, damp and rot treatment, replacing roof slates, or mending broken windows.
Understanding what is not allowable for tax deduction
Improvements are not allowable deductions from rental income and are essentially the opposite of repair and maintenance costs, in that they will usually materially add value. Examples of improvement costs would be: adding an extension, installing a security system if there was not one before, new hard wood floors (where there was concrete, lino or tiling flooring before). Although these costs would not be allowable deductions against the rental income, it is worth keeping records of improvement costs incurred as they may be allowable deductions when calculating the capital gains tax position on a future sale of the property.
There is a key exception to the difference between maintenance and improvement which is where modern standards of items are superior to traditional standards. An example of this is replacing single glazed windows with double glazed windows. This is treated as maintenance rather than improvement because double glazed windows are the modern minimum, so even though there is an improvement in the glazing quality it is accepted as the modern equivalent.
The initial cost of domestic items such as furniture, household appliances and furnishings, is not an allowable deduction against rental income. However, if any of these items are replaced at a later date then relief is currently allowable for the cost of replacing the item.
If on the day of purchasing the property it could have been let, then subsequent repairs should be allowable deductions provided that they are not an improvement cost and are not essential for the letting of the property. For example, fixing roof slates or repairing a dripping tap. This will also include costs of pre-decoration and spruce up costs, as long as the property could have been commercially let without that work having been carried out. For the costs incurred pre letting to be allowable the purchase price of the property should not be affected by the state of disrepair and the property must be able to be used to earn profits immediately following the purchase.
If the allowable expenses are more than the rental income received then a loss will be generated on the rental business, these losses are automatically carried forward and offset against rental business profits from the same rental business in future years.
Protecting your income
“If you rely on your monthly rental income to pay your mortgage and stay stable, a drop in your rental income may spell out a difficult time ahead. Mary West from the Money Consultancy adds
“With rents in the UK rising and the financial difficulties posed by the Coronavirus, even the best renter may struggle to pay rent. It’s certainly worth looking into available landlords’ insurance and what you’d be able to recoup in the event your tenant is unable to pay their monthly rent.”
Whether you are looking to rent out your second home or expanding your existing portfolio, we can make sure you get the most out of your property. Contact me for an informal discussion on how we can help.
