Property:
Letting your home
When you let your home, or part of it, you may have to pay income tax on the rent and you may prejudice its future status for capital gains tax principal private residence exemption.
Income tax
The general rule is that all income is taxable. In principle, that applies also to income from letting your home, or part of it. You are allowed to deduct relevant expenses, such as property insurance and repairs, council tax and water rates. If you borrow money to meet expenditure on adapting your home for letting, you may be able to deduct the interest when calculating your taxable income. There are complicated rules governing furniture, fixtures and equipment which form part of the letting; but you may get tax relief, possibly spread over a number of years.Rent a room scheme
There is a valuable “rent a room” relief. If you let part of your home, and the gross rent does not exceed a set limit, currently £4,250pa, then the income is not taxable. The property must be furnished; and any separate charge for furniture must be included when comparing the rent with the limit. If the rent exceeds the limit, the whole income is taxable, with relevant deductions; or you can choose to have only the excess taxed, but with no deductions. Which treatment is better will clearly vary with the facts of each case. The “rent a room” relief applies only if the property remains your only or main residence; so if you move out you will not get the relief. But you may create a self-contained flat provided that the adaptation of the property is only temporary.Letting your home out whilst working abroad
If you let your home out whilst working abroad, the position is complicated. If you remain resident in the UK for tax purposes, then the income remains fully taxable in the UK. If you become non-resident for tax purposes, the normal rule is that your tenant (or the letting agent, if you have one) must deduct basic rate tax from the rent paid, and pay that tax over to HM Revenue & Customs. But the detailed rules are complex. Whether you remain resident or become non-resident for tax purposes is also a highly technical question. This whole subject is one on which you must take professional advice. Do not forget tax in the country in which you will be living. You may, or may not, be taxable there; and the taxable amounts may well be computed differently from the UK computation. For advice on tax in other countries, we can introduce you to our local colleagues within BKR International, an association of independent member firms with 330 offices in over 67 countries throughout the world.Capital gains tax
Normally, any capital gain on the disposal of your principal private residence is exempt from tax. But you get only proportionate exemption if part of the property was not your principal private residence, or if the property was not your principal private residence throughout the whole period of ownership. Clearly, letting may prejudice your entitlement to full exemption when you eventually dispose of your home. Fortunately, there are several ways in which you may still get full exemption (or a higher exempt proportion).If you are absent from your home temporarily, for example while working abroad, your UK home may still qualify for exemption. An absence of up to 3 years is permitted. This is increased to 4 years in some cases where your employment (or self-employment) requires you to live elsewhere. It is increased without limit if the duties of your employment are performed wholly outside the UK. If you have another home during the period of absence, the rules are tricky and you will certainly need specialist advice.
The final 3 years of ownership normally qualify for exemption. So if you move out and later sell your home within 3 years you will normally get complete exemption.
There is a special exemption for letting your home. (Note, however, that if you create a self-contained flat then that flat is no longer part of your home and does not qualify for exemption.) First, you calculate the proportion of any gain attributable to the letting (based on the amount of space let and the length of the letting). Then you apply that proportion to the whole gain. If the proportionate gain attributable to the letting is £40,000 or less, it is exempt from capital gains tax. If it exceeds £40,000, only the excess is taxable.
If you take in a lodger, who shares your home with you and takes meals with you, that is not regarded as letting your home, and the whole property still counts as your home.
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