Letting your home

There is no tax relief on purchasing your own home. Where possible, business owners should try to structure their affairs so that the business has borrowings and minimise the mortgage for the home.

The mortgage is a major outgoing for most people, and both interest and capital repayments have to be funded out of our taxed income.

For example, you would need a salary of over £1,000 per month as a 20% tax payer, or more than £1,300 per month as a higher rate tax payer, to pay £800 per month of mortgage interest.

With recession starting to bite and taking into account the difficult property market, one solution might be letting either part or all of our homes. This article sets out a number of the tax considerations

Rent-a-room relief

Rent a room relief can be claimed if you let out a room in your home. The following rules should be considered.

1. If you don’t make such an election you will be taxed on the difference between the rents you charge and directly attributable costs (such as a proportion of gas, electricity, water and general rates, repairs and of course mortgage interest).

2. If you do make such an election you will be taxed on the difference between the total rents you receive and £4,250. Expenses are ignored.

Where the property is jointly owned the £4,250 will be shared between the partners, as will the rents.

In most cases it will be necessary to work out the tax charge using both methods to see which is more beneficial.

Where the rents received from letting a room are less than £4,250 per annum (£354.17 per month) the income is entirely tax free!

Letting your home.

If you decide to move from your home and let the whole property the following points should be considered.

– You will be taxed on the rents received less attributable costs. Costs will include mortgage interest paid.

– As the property has been your principal private residence any gain that you make on subsequently selling the property will be tax free until you move out plus the last three years of ownership. Consequently if you do not let for more than three years there will be no capital gains tax to pay.

– If you let for more than three years you can also make a claim for lettings relief which is currently worth £40,000. Also, the relief is available to both owners if property is jointly owned including married couples or civil partners.

You should also be mindful in both these situations that letting or part letting of the property may be prohibited by your mortgage lender.

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