HMRC seems determined to make things less attractive for buy to let landlords by increasing stamp duty as well as phasing out the ability to claim your mortgage interest as an expense. The latter means that some landlords will be paying tax on income that they don’t actually receive due to mortgages. So what are the alternatives?
Rent a Room
Under the Rent a Room scheme, you are allowed to claim rental receipts of up to £7,500 per annum tax free for renting a furnished room in your home. You can rent out as much of your home as you like. This scheme can’t be used for homes converted into separate flats.
In addition, you can also provide services to these guests such as cleaning and laundry, possibly even providing meals. This residence has to be your main or only residence.
Furnished Holiday Let (FHL)
A Furnished Holiday Let is a type of rental property classification in the UK and Ireland. It provides some tax advantages as long as it meets requirements relating to availability, actual bookings and level of furnishings.
Contrary to longer term lets, capital allowances can be claimed to kit out your holiday let (making it higher spec would obviously attract higher income). Other expenses that can be claimed are similar to a buy-to-let property; interest on loans, bills, letting fees, cleaning products, cleaning costs, general maintenance costs. Beware of personal use – if you use the property for half the year, only 50% will be considered commercial expenses.
Earnings are classed as ‘relevant earnings’ so can be used to make pension contributions.
When you sell the property you may be able to claim Capital Gains Tax reliefs which are also not available for normal buy-to-let property owners.
To top it off, council tax is not applicable if you rent the property out for more than 140 days per annum. However, business rate property tax is payable (although you may be eligible for small business rate relief on this.
You may wish to consider whether these benefits outweigh the risk of not filling the property for sufficient days of the year. To qualify for the above, the property must be available to the public to let for at least 210 days as well as actually let for 105 days.
In addition, if your income exceeds the current VAT threshold which is £85,000, you will have to become VAT registered and hence charge VAT on rental incomes. This only becomes an issue with multiple properties (or indeed expensive ones).
Contact our tax department for advice on Rent a Room, holiday lets or buy to let properties
McPhersons Chartered Accountants