Page last updated at 14:33 GMT, Thursday, 3 July 2008 15:33 UK

Tax issues of renting out a UK home

Money Talk
By Leonie Kerswill
Tax partner at PricewaterhouseCoopers LLP

Leonie Kerswill
Leonie Kerswill warns about the tax implications of renting out property

As the summer season brings a multitude of festivals and sporting tournaments, people living near events such as Wimbledon should consider the tax implications involved before cashing in on renting out part or their entire house to fans.

Others, perhaps looking a few years down the line and thinking of the prospect of making some extra money from the millions of tourists heading to the Olympics in 2012, should also take note.

While the tax rules for renting a room may have changed by then, there will always be tax implications to consider.

There are a number of reliefs available which may minimise your tax liability if you are considering renting your property out.

Expenses

Income tax will be charged on the rental income less any allowable expenses. Broadly speaking, allowable expenses are those that are of a revenue nature rather than a capital nature and are those "wholly and exclusively" for the purpose of the lettings.

Common allowable expenditure includes agents' fees, maintenance, repairs and redecorations.

Common disallowable expenditure includes improvement or enhancement expenditure, which is highly unlikely for such short-term lets in any event. Any expenses that relate to the property as a whole, such as council tax or insurance, must be divided between rental and private use.

What is classed as allowable or disallowable expenditure can be rather complex and the nature of an expense should be researched before presuming it is allowable.

"Rent a room" relief

If you are planning on renting out a furnished room of your main residence to, say, a tennis fan while you continue living there for at least part of the letting period, you may be able to claim "rent-a-room" relief.

HM Revenue and Customs actively check adverts for letting accommodation during major events and failure to report your income could result in a penalty on top of your tax bill

This means no tax is payable if the gross rents for the tax year - before deducting expenses - do not exceed 4,250.

If you claim this relief, it is still necessary to declare it on your annual self-assessment tax return by ticking the appropriate box on the land and property pages of the return.

The relief is not automatic and it may be favourable to opt out of the relief depending on the levels of income and expenses involved.

For example, if the related allowable expenses exceed 4,250, but the rental incomes does not, it will be more beneficial to not claim this relief and instead create a rental loss.

If the rental income exceeds 4,250 then you may either make the "rent-a-room" relief claim and deduct 4,250 from the rental income, the balance being taxed in full, or deduct your expenses from the gross rentals and be taxed on the net income.

In addition, be aware that your mortgage lender and/or insurance provider may have restrictions in relation to renting out a room or the whole of your property. Always check with them first to avoid potentially invalidating your policy.

Capital gains tax

Letting out the property on a regular basis or for long periods of time may bring capital gains tax (CGT) implications on the eventual sale of the property.

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If your home, or any part of it, is let out as residential accommodation at any time during the period of your ownership, the appropriate fraction of the gain arising on sale, if any, is chargeable to CGT.

However, the chargeable gain is reduced by a maximum of the lower of the relief attributable to owner-occupation, or principle private residence relief, and 40,000.

It should be noted that where a lodger lives as a member of the homeowner's family, sharing their living accommodation and taking meals with them, there is no chargeable gain in respect of the letting. Similarly, no chargeable gain arises in respect of accommodation let out under the rent a room relief rules.

Bear in mind that HM Revenue and Customs (HMRC) actively check adverts for letting accommodation during major events and failure to report your income could result in a penalty on top of your tax bill.

It is important to remember that the income received must be fully disclosed on your self-assessment tax return and any individuals who did not previously complete self-assessment returns must do so for this period.

Indeed, if you do start a letting activity you should inform HMRC within six months of the end of the tax year when you commenced letting.

Details of how to register for self-assessment tax returns can be found at http://www.hmrc.gov.uk/sa/complete-tax-return.htm.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.




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