• When does the taxman need to know about rental income?

  •  

When does the taxman need to know about rental income?Insert main product banner here

When does the taxman need to know about rental income?

A recent survey by Halifax Home Insurance estimated that the real number of lodgers in the UK is six times higher than official figures. The survey estimates that 970,000 of us are renting a room in someone else's house, but that new landlords are "keeping tenants under the radar" because of concerns about tax. So just when does the taxman need to know about rent?

The Rent a Room Scheme

If you're only letting out a part of your own home, you may be eligible for the Rent a Room scheme. This allows you to have a lodger in your own home without paying tax on their rent. As you might expect, there are some limitations:

  • You can't earn more than £4,250* per year
  • The scheme doesn't apply if you've split the house into separate flats, or are letting the property unfurnished
  • You can't claim any expenses

But if you have a traditional-style lodger and their total payments are less than the threshold, you won't need to declare that income or complete a tax return if you're not otherwise self-employed.

The Rent a Room scheme is available for your "only or family home", that is, the one where you and your family live for most of the time. So if you're letting out a house you can't sell, in order to be able to afford to live elsewhere, Rent a Room doesn't apply.

There's more information about Rent a Room on the direct.gov website.

Property rental is a business

Even if you're only letting out one property. This includes so-called "accidental landlords", who are letting out houses they can't sell in the current housing market, as well as those who let out their own home while living elsewhere.

Tax is assessed on the profit from rent: that is, all the income from all your properties minus all allowable expenses. If you rent out more than one property, you'll be able to set a loss on one of them against profit from the rest.

If your annual profit is less than £2,500* and you're on PAYE, any tax due can be paid via an adjustment of your tax code. Ask your Tax Office for form P810. Those earning more than £2,500* or who are self-employed anyway, will need to fill out a Self Assessment tax return.

Find out more about tax on residential property lettings on the direct.gov website.

It's worth consulting an accountant about expenses; they can often save you more in tax than you'll pay them in fees. And remember to keep proper records: the taxman can demand to see supporting documentation for your income and expenses figures for up to six years.

Finally, the best bit of advice I can offer is that if you have any questions about your tax position, talk to HMRC. They are very helpful - and it's always better to talk to them before they want to talk to you!

* Figures given are for 2009.

For more tips and advice for landlords, check out our blog and follow @AvoidTheVoids on Twitter.