Rent a room relief – income tax
Where a home owner lets part of his main residence to a lodger, rental income is only chargeable to income tax to the extent that it exceeds £4,250. There is no limit to the number of rooms, but only £4,250 in total is exempt. This figure has remained unchanged since 1997-98. HMRC state that income from property that is within the total exemption is to be disregarded for tax return purposes.
Buy to Let
Letting property, a ‘business of letting’ for income tax purposes, is not a trade, but is treated as one for many tax purposes. Expenses available include:
- advertising for tenants
- rent collection costs
- bad debts
- agents’ charges for management
- accountancy fees for accounts preparation
- repairs to property
- If the property is let furnished, 10% wear and tear allowance (i.e. 10% of net rental income, excluding rates, water rates and council tax if paid by the landlord) will be deductible for income tax.
Capital expenditure is not allowable.
Interest paid on loans used to buy the land or property used in the rental business, for improvements or alterations, repairs etc. will be deductible, together with incidental costs of arranging loan finance.
Using the home loan
People often use the equity in their own home to fund buy to let properties. It does not matter what the borrowing is secured upon, provided the interest is incurred wholly and exclusively for the purposes of the business of letting.
It may be the case that the buy to let property is in one person’s name but the main residence is in joint names. HMRC usually normally allow relief for the home funded interest provided the letting business bears the cost of the interest. It is advisable to ensure that money passes from the business account to the joint account to fund the interest.
Losses can only be set off against other income from UK property (if they are losses from UK property) or overseas property if they arise from overseas property. The two exceptions are losses arising from capital allowances which can be offset against other income or furnished lettings losses (see below).
Furnished Holiday Lettings (FHLs)
Furnished holiday lettings in the UK (and latterly the EEA) have traditionally received certain favourable tax treatments normally afforded to trades.
However, 6 April 2011 and 6 April 2012 saw some important changes to the regime.
From 6 April 2011, it was no longer possible to set off losses arising on a furnished holiday letting against general income (or capital gains). After 2010/11, you are only be able to carry FHL losses forward against future profits from furnished holiday lettings.
The following tax reliefs, remain in force beyond 6 April 2011:
- Various capital gains tax reliefs, such as roll-over relief for reinvestment in business assets, hold-over relief for gifts, entrepreneur’s relief and relief for loans to traders.
- Availability of capital allowances.
- Income qualifies as relevant earnings for pension purposes.
Qualification as an FHL:
From 6 April 2012, the eligibility criteria for qualification as a furnished holiday letting has changed:
For a property to be qualified as an FHL, it must meet the conditions set out in s325, ITTOIA 2005, broadly:
- The property must be available for letting to the general public not less than 210 days in the tax year; and
- The property must be actually let to members of the public for at least 105 days in the tax year.
Prior to 6 April 2012, the eligibility criteria is as follows:
- The property must be available for letting to the general public not less than 140 days in the tax year; and
- The property must be actually let to members of the public for at least 70 days in the tax year.
There is an element of transitional relief available on the shift to the new rules from April 2012. Where a business fails to meet the stricter ‘actually let’ let requirement for a period of one or two years, it will be possible to elect for FHL treatment to continue for 2011/12 and subsequent tax years.
Holiday accommodation is standard rated for VAT. If the owner has a significant portfolio of properties, his total turnover may exceed the VAT registration threshold. Where a property is situated in another EEA country, local VAT must be charged if that country’s threshold is exceeded; Spain, for example, has no exempt threshold.