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You can become a landlord for many different reasons; you might not even think of yourself as one. This could be because you’ve:
- inherited a property
- just rented out a flat to cover your mortgage payments
- moved in with someone and need to rent out your house
These examples show some of the common tax errors people make when renting out their property and are part of the Let Property Campaign.
Contact HM Revenue and Customs (HMRC) to get help if any of them apply to you.
1. Moving in together
Beena moved into her partner’s flat several years ago, and decided to rent out her own property rather than sell it. Beena didn’t think she was making a profit which needed to be taxed, because the rental income just covered the mortgage payments.
When working out her rental profit, Beena needs to be aware that the only allowable expense for her mortgage is the interest amount of her mortgage repayment.
The interest amount of mortgage payments is restricted to the basic rate of income tax, irrespective of which income tax rate Beena normally pays for other income she may have. Beena should use this guidance to work out the tax relief she can claim.
2. Inheriting a property
Winston inherits a house and decides to rent it out rather than sell it. He uses a local letting agent to find him a tenant and collect the rent on his behalf. The agents also organise any repairs to the property, deducting the costs from the monthly rent they collect.
Winston has been renting the house out for several years, but didn’t realise he should be declaring his rental profits to HMRC. He can find guidance on how to calculate his rental profit. He can tell HMRC about rental profit from previous years using the Let Property Campaign.
3. Property bought as an investment
Sharifa invested in a property to rent out. She wasn’t aware that renting out a house might involve paying extra tax.
Sharifa can use HMRC guidance to work out if she is making a profit from her rental income. She will need to declare any rental profit to HMRC.
She also needs to consider Capital Gains Tax if she sells the property.
Carl and Suzy jointly own their house and are getting divorced. They decide to rent out their jointly owned house and both move into smaller properties.
Carl and Suzy agree to use a letting agent to find a tenant and collect the rent.
Carl and Suzy can read HMRC guidance to find out how to declare their own share of their rental profits to HMRC.
Ketan and Priya are married and own a house together. They moved to another area because of their work and rented out their house. They didn’t tell HMRC about their rental profit.
Ketan and Priya have now been renting their house out for three years, and never got around to declaring their rental profit to HMRC.
Both Ketan and Priya need to declare their own share of their rental profits to HMRC. They can use HMRC guidance to find out how to do this.
6. Care home
Brenda has moved into a residential care home, and in order to pay the care home fees she rents out the house she owns through a letting agency.
All of the rental profit she receives goes towards her care home fees. Because of this, Brenda mistakenly doesn’t see her rental profit as taxable income.
Brenda needs to declare her rental profits to HMRC.
7. Jointly owned investment property
Kate and Emma are civil partners and have jointly purchased an investment property which they plan to renovate and rent out.
Kate and Emma know they will have to declare their rental profit to HMRC, and they are aware that they can claim certain allowable expenses.
As Emma pays Income Tax at a higher rate they decide to include all the allowable expenses on her Self Assessment tax return, to reduce the amount of tax she pays. However, they haven’t followed the correct rules.
Kate and Emma need to ensure they are accounting for their rental income and expenses correctly, and should read guidance from HMRC about jointly owned let property.
8. Property bought for family member at university
Alan and Sue bought a flat for their son to live in while at university, and they don’t charge him any rent. Their son allows three friends to move in with him and the friends pay rent to Alan and Sue. The rent received is more than the mortgage payments. The arrangements with the flatmates are informal, so Alan believes there is no tax to pay.
Alan and Sue are employees and have their tax deducted under PAYE. Both need to declare the rental profit to HMRC after deducting allowable expenses.
Alan and Sue can read HMRC guidance to find out how they declare their rental profit.
9. Armed Forces
Tom is in the armed forces and finds out his next posting is an army base in Cyprus, so he moves there with his family.
Tom decides to rent out his family home in the UK to a friend, but Tom and his wife Anna forget to check if there are any tax implications to renting out their house.
10. Tied accommodation
Robert and Jane become landlords of a pub and move into the flat above the pub. They decide to rent out their house to their nephew and only charge him the equivalent of their monthly mortgage payment.
Robert and Jane don’t consider themselves landlords, as they aren’t making any money from renting out their house. There is no official paperwork in place and they see it as just helping out a family member.
They are treating the whole mortgage payment as an allowable expense which is incorrect.
The only allowable expense for their mortgage is the interest amount of their mortgage repayment. The interest amount of mortgage payments is restricted to the basic rate of income tax, irrespective of which income tax rate Robert and Jane normally pay for other income they may have. They should use this guidance to work out the tax relief they can claim for mortgage interest.
Robert and Jane need to know what allowable expenses they can deduct to correctly work out their rental profit. They can use guidance from HMRC to help with this.