If you are renting a property or rooms within the property you live in, it is important to remember that you are classed as a landlord and therefore there are some tax 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, this limit is reduced if the rental income is split between two or more people.
Rental income above £7,500 from your own home, or other property rental, must be declared to HM Revenue and Customs (HMRC) on a Self-Assessment tax return on the land and property supplementary pages. It is your responsibility to inform HMRC when you are in receipt of rental income.
Claiming allowable expenses
Expenses can be claimed to reduce the income tax payable on rental income, 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)
Repairs and maintenance costs are allowable deductions from rental income and will be those costs incurred to keep 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.
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. Although these costs would not be allowable deductions against the rental income, it is still 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 and household appliances is not an allowable deduction against rental income. However, if any of these items are later replaced 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 they are not an improvement cost and are not essential for the letting of the property. 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, the loss is automatically carried forward and offset against rental business profits from the same rental business in future years.
If you are looking to rent out your second home, expanding your existing portfolio or would like more information on the above, please contact me for an informal discussion on how we can help.