Tax Rules For Property Rental
10th March 2016
Renting out a room or a property you don't need for yourself can be a good way of making some extra money. It can even be a career if you put your back into it. You've got to be sure you're on the right side of the tax laws, though. Whatever your main job is, if you're making money on the outside, the taxman's going to want to know about it.
There are some decent benefits to renting out, over and above the basic money you're getting. Unless you're a landlord as your main job, you won't be paying National Insurance on your rental income. Better be sure HMRC understands you're not a full-time landlord, though. If they decide you are, they'll charge you Class 2 and Class 4 NI for running a property business. There are specific and separate rules for running a B&B, hotel or FHL business.
Generally, to class as being a professional landlord you need to be renting out more than one property, and buying new properties to rent out. If not, you don't have to worry about the NI even if you're doing other things landlords do - like arranging repairs or advertising.
When Do You Need A Self Assessment Tax Return?
When it comes to keeping the taxman in the loop, you'll have to fill in a Self Assessment tax return if you're making between £2,500 and £9,999 a year after expenses. You'll also need to fill one in if you're getting £10,000 or more before expenses. We know - it's a headache, but HMRC get very cross if you don't get things like this right.
If you've already made the mistake of renting out a room or property without telling HMRC, you can fix it. Declaring the unpaid tax would be a wise move, and could reduce any penalty they slap you with. Either way, coming clean now's a lot better than being found out later.
It's not all dire warnings and bad news, of course. There are opportunities to be jumped on if you're smart about it. Depending on what kind of property you're renting out, you can claim a range of expenses to lower the tax you're paying. Like other kinds of expenses, the things you can claim for have to be necessary. Here are a few examples from the HMRC website:
- Letting agents’ fees and certain legal costs.
- Accountants’ fees.
- Buildings and contents insurance.
- Interest on property loans.
- Maintenance and repairs.
- Utility bills and Council Tax.
Watch out when you're improving the property. Not everything you spend will count as "necessary". You can't just rip out and replace the entire kitchen just to fix a leaky tap. Or, rather, you can - but you can't expect the taxman to call that an allowable expense. Think "wear and tear" rather than "major renovations".
Renting Out A Room In A House You Own
If you're only renting out a room in a house you own, you might be able to claim tax relief on the income. As long as you're getting £4,250 or less per year from it, the money won't be taxed. From April 2016, that figure's rocketing up to £7,500! Of course, being untaxed also means that you can't claim expenses on it either. You basically can't rent out your cake and eat it too.
With about 40% of households currently having two or more spare bedrooms, it could be a good time to consider whether a lodger might provide a worthwhile second income. If you've had your ear to the ground, you might have heard of the so-called "sharing economy". Outfits like Airbnb are providing ways for people to rent out rooms without taking on the hassle of a full-time lodger. You'll still need to tell HMRC about the income, though.
The bottom line is that renting out can do wonders for your month-by-month finances. It comes with responsibilities, though - so you need to go in with your eyes open. As always, come to RIFT if you want to talk through your options.