In the current economic climate, many people are generating extra income from renting property. Whether you are an investor that handles multiple properties or a homeowner renting out a room, there are some tax implications that you will need to consider.
The rules and allowances for property rental have changed recently and for those making money from lettings, it will be necessary to understand the new rules. Here are some of the new adjustments to consider before renting out your property.
Rent a room relief
If you own your property and make extra income by renting out a room, the good news is that you can earn up to £7500 before needing to complete a tax return. The relief is applied automatically meaning that homeowners do not have to do anything to get the allowance. If you are a resident landlord, whether you own your home or not, you can benefit from the scheme. Even in the event that you operate a guest house or a B&B the rule still applies. It does not apply if your property is divided into separate flats or residences.
Private residence relief
The news is not so positive for those that own their property and have decided to rent the whole property to tenants. Under previous tax laws if you decided to then sell the property you would have received Private Residence Relief. The relief provided homeowners with an exemption from Capital Gains Tax for the time they lived in the property and for up to 18 months after moving out. The new rules have reduced the exemption term to just 9 months. In addition, the £40,000 of lettings relief that was previously available to homeowners who rented out their main home, will now only apply if landlord and tenants share the same building.
Buy to let mortgages
In the past, landlords had the advantage of being able to offset mortgage interest against rental income. This benefit has been gradually reduced over the past few years and no longer exists. Instead, the allowance has been replaced with a 20% tax credit on interest payments, which gives landlords some relief but may not be helpful for those in a higher tax bracket.
To level out costs, some landlords are choosing to incorporate their property portfolios and operate as a limited company. This means that a corporation tax of 19% will need to be paid, but in many instances, this can be lower than individual tax rates.
Selling a rental property
If the rental property is to be disposed then there will be the matter of Capital Gains Tax to consider. Even though there is no way around the tax liability on property sales, the government has extended the time allowed to complete a CGT return and payment. What used to be required in 30 days has been extended to a 60 day period. This can be a blessing for landlords selling their homes as the process for filing paperwork and paying Capital Gains Tax can easily run into delays, causing financial penalties. The newly extended period will make the process smoother and easy for landlords to comply with.
Final Words
Keeping up to date with new tax laws and changes is essential for landlords that want to avoid issues and possible financial penalties. A tax expert can help you navigate the required tax obligations and keep you on the right side of the law. Our team provides expert advice and can guide you in the correct procedures and preparation of your tax responsibilities. Contact the Aftax team today and see how we can help you.
