There are many people who become “accidental landlords” and don’t realise that they should be declaring their rental income.
HMRC’s Let Property Campaign has the following examples whereby this might be the case:
- Moving in together
Sarah moved into her partner’s flat several years ago, and decided to rent out her own property rather than sell it. Sarah 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, Sarah needs to be aware that the only allowable expense for her mortgage is the interest amount of her mortgage repayment. Sarah needs to declare her rental profit to HMRC.
- 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 that he should be declaring his rental profits to HMRC. He can tell HMRC about rental profit from previous years by using the Let Property Campaign.
- 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 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 will need to declare their share of the rental profit 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.
- 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.
- 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 that 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 of 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 that they are accounting for their rental income and expenses correctly and apportioning them according to the rules for jointly owned let property.
- 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.
- 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.
Tom and Anna need to check the rules for non-resident landlords and declare their rental profit on a self assessment tax return.
- 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 payment.
Robert and Jane need to know what allowable expenses they can deduct to correctly work out their rental profit.