Become a landlord. Make money. Might even be tax free.
You know how it is. Once upon a little while ago buy-to-let was THE thing to do. Then everybody got wind of it, property prices went through the roof and there was no longer any money to be made out of it*
However, now that no-one who needs one can afford to get (or pay) a mortgage, rental returns are on the up. Add to that a whole raft of people who can’t actually sell their house at the moment and the rental market is buoyant once more, and even you may be thinking of making a shiny penny by becoming a landlord.
But before you take the plunge, make sure you know the tax implications of your actions. After all, you can’t make money for nothing, no matter what Dire Straits say.
Buy-to-let or renting out a home you don’t live in
Earning money from renting out your property is treated as if you were in the business of renting out property. As such, the rents you receive are the business income, and from that you can deduct relevant business expenses. Items like agents’ commission, council tax and mortgage interest (ie not the bit that reduces our capital balance) are all examples of deductible expenses.
A sticky area with rental properties though is the cost of repairs and maintenance. If you are letting your property out furnished, there is a specific deduction for ‘wear and tear’ of the items of furnish, calculated as 10% of the total rental income less council tax. For most people this works out as more generous than what they actually spend. Alternatively you could use the replacement method where you do not claim for wear and tear but you, say, deduct the whole cost of replacing a washing machine, for example.
But what if your property is not furnished? Well, repairs, in the strict sense of fixing or maintaining something that is already there are allowable, but anything that adds to the property is not allowed as an expense, but could instead be deducted from the sale price when you eventually sell the property. A classic example of this was replacing single glazed windows with double glazing. Strictly speaking this was not a repair, as you were not replacing like with like, and the full cost of double glazing would be disallowed. However, in recent times, HMRC have conceded that it is quite difficult to find single glazing anymore, so double glazing is now allowed as a repair.
After your expenses have been deducted, you will then be charged income tax on the profits. The rate will clearly depend on whether you are a basic rate (20%), higher rate (40%) or additional rate (50%) taxpayer. This income is untaxed income, which means it does not have tax deducted at source, so not only will you need to put aside the relevant amount of tax, you will need to inform HMRC of your additional revenue. It is YOUR responsibility to tell them.
But still, 80%/60%/50% of something is better than 100% of nothing, right?
Renting out (all or part of) your own home
Traditionally, the idea of renting out part of your home conjured up visions of bearded single men, with high waistlines and NHS glasses calling themselves the lodger. While this is still an option for the beardophiles among you, there are other ways of making a buck from your home.
New sites like airBnB allow people to short-term rent their home, or part of their home to holidaymakers or travellers looking for somewhere to rest their head. Depending on how much you can get for your pad, it might be worth crashing with a friend or the parents for a week or two in order to bank the bucks.
The good news is that, within limits, this income could be completely tax free. The rent-a-room scheme exempts up to £4,250 of income per annum from tax, provided you are renting out your actual home, not a second property. The £4,250 is gross receipts (ie before deducting any expenses), but if your receipts are over £4,250 you can elect to tax only the excess over £4,250, but not claim any expenses- which is likely to be attractive to those with income only just over the limit. Otherwise the standard method of calculation (detailed above) will apply.
So if you live somewhere fabulous and need us to test your property before offering it up for rental, we are happy to oblige. And none of us have beards. Except me.
*doesn’t stop BBC1 showing constant reruns of Homes under the Hammer though.