A Novice's Guide to Rental Income and Taxation

In the mobile society in which we live, it is more common than not for people to move home on a regular basis to further their careers, or improve their lifestyle, and the need for rented accommodation has grown correspondingly.

This has encouraged many more people to consider the benefit of letting their property than ever before, but it is usually only as an after thought that taxation is considered.

As with any business, the rental of property has to be properly documented both for the Inland Revenue and the landlords benefit (at the end of the day they need to know how profitable it is as well as the Inland Revenue) and full records should be kept of all income, including deposits received, as well as all expenditure incurred.

Those people who have a mortgage on their property need to ensure that it is only the interest element which is being set against the rental income and not the the capital as well. A certificate of interest paid form should therefore be obtained from the lender for each fiscal year that the property is let. Bearing in mind that the lenders will often increase their loan interest rate when they are aware that a property is let, all available interest paid should be claimed as an expense.

If your loan interest paid exceeds your net rental income (after other expenses have been met) the unused element can be carried forward to the next tax year and set against that year's rental income. For owners of multiple properties, any loss arising on one property can be set against other rental receipts in that year.

Insurance, often charged at premium rate if the insurers consider the property is being used "commercially", and the cost of complying with local authority and fire regulations, are also legitimate expenses, as are professional fees, repairs and renewals to the fabric of the building, plus costs of redecoration. However, the property owner should be aware of challenges from the Inland Revenue if replacements e.g. bathroom suite, are not "like for like"; expenditure incorporating enhanced value is likely to be disallowed, unless there is a good commercial reason.

Where husband and wife jointly own the let property, the rental income will be divided equally between them for tax purposes, irrespective of their actual split of ownership and the actual extent of their share of the rental income. If, however, they do legally hold the property in unequal shares, thay can elect for their tax treatment to mirror the actual position. Both spouses must make the election. It is possible to take advantage of this rule where, for example, it is desired to utilise one spouse's unused personal allowances without giving away a substantial share in the property. If property is held as to 90% by one spouse and 10% by the other, then in the absence of any election to the contrary, the rental income will be split equally between them. Where one spouse does not work and has no other means of utilising their personal allowances, the couple concerned may wish to consider transferring the ownership of the property from joint to sole, to reduce the level of taxation. With the standard personal allowance set at £4,745 for this year, the potential tax saving for a basic rate taxpayer would be £1,044 and a higher rate taxpayer could save as much as £1,898, assuming that the net rental income exceeded £4,745 per annum in the first place.

It should not be forgotten however, that it is possible to let a proportion of your own home to what is effectively a lodger/paying guest, and still achieve a comfortable level of income, which can be kept out of the taxman's clutches, via the "rent a room" scheme. This can be particularly useful to someone who has surplus living accommodation and needs additional funds to pay a mortgage or rent. An annual allowance of £4,250 is available to set against gross rental income exceeding that amount, or if the gross receipts are less than £4,250 per annum, the entire rent becomes exempt from tax (if the rents are shared, the allowances must be shared in the same proportion).