With the property market still slow a lot of people cannot sell houses which they wanted to shift long ago. Perhaps they have been relocated with work and are stuck with the old home, or perhaps they bought something when times were good hoping to sell at a profit a year later.
Either way this means there is a growing band of people added to existing landlords, who find themselves letting out a property. The question I am often asked is: Must I tell the Revenue? The next question is: What can I claim against the rents?
In answer to the first question, yes, if you let out a property you must tell HM Revenue & Customs. I recommend this is done in writing so you can keep a copy of the letter. Tell HMRC the address which you are letting out and the approximate level of annual rents.
Chances are the tax office will send you tax returns from now on unless the income is very modest. Once you get a tax return you must complete it to show all of your taxable income for the year. So you will have to show employment income, savings income and things like gift aid payments, as well as the rents. This can be a bit of a hassle and some people ask an accountant to help them. If the let house is owned jointly each person must declare their share.
When you come to declare the rents you have to be careful what figure you show.
Firstly rental accounts should be prepared on the same basis as business accounts. This means that if rent is due it must be declared, even if you have not been paid it. So if you let out the house for 12 months at £500 per month the rent declared will be £6,000. This is even if the tenant owes you for two months. If, eventually, you never get that money and have to give up on it then that ‘bad debt’ can be claimed and will reduce your rental income.
The other common mistake with declaring rents occurs when people use a letting agent. The agent collects the rent and then deducts their commission. For simplicity assume the commission is 10%. If the agent collects £500 and deducts £50 they pay you £450. You must, on your tax return, show the full £500. The £50 agent costs can be claimed as an expense.
So what other expenses can you claim against rents? The biggest one is often loan interest. Be careful here. Firstly you can only claim the interest element of a mortgage payment, not any capital repayment. The second thing about claiming interest is that the loan does not have to be secured on the rental property.
Let’s say you extend your mortgage on your main home. It was £100,000 and then you borrow a further £100,000 to help buy a property to let out. When doing your tax return you can claim the mortgage interest on the half of the loan used to buy the investment property.
You can also claim tax relief on rates, insurance and ground rent. Repairs can normally be claimed, though not if you embark on a massive renovation before you get your first tenants.
As a general rule home improvements cannot be claimed against rents. The exception here is replacing single glazing with double — that is allowed as if it is a repair. When all the expenses are added up there is one further tax relief available where the property is let out furnished. This is called wear and tear. Take the rents for the year and deduct the rates. Then 10% of what’s left can be claimed each year towards replacement furniture and white goods etc. Over a number of years this can be a valuable relief — especially if you keep a grip on what you actually spend on replacing furniture etc. Accountant’s fees can also be claimed against the rents.
When all is deducted you are left with either a profit or a loss. If a profit then it will be taxed as if it is the top bit of your income. This could mean all at 20%, all at 40% or a mix of the two. If you have made a loss then the only thing to do with it is to carry it forward. If you make a profit next year then the loss will reduce it. If you make another loss then the losses simply accumulate.
Adrian Huston, a former tax inspector, is a director of Belfast tax and accountancy firm Huston & Co — www.huston.tv or 028 9080 6080.