Tax plan­ning for res­i­den­tial in­vest­ment prop­erty pays off

Yorkshire Post - Property - - PROPERTY -

in that pro­por­tion, and with one im­por­tant ex­cep­tion you do not need to change the un­der­ly­ing own­er­ship. That ex­cep­tion is if you are a mar­ried cou­ple or civil part­ner. In that case you will need to make a legally ef­fec­tive par­tial trans­fer of the prop­erty and send an elec­tion in to HMRC about it. This does not nec­es­sar­ily mean a con­veyance, as the trans­fer can be made via a “dec­la­ra­tion of trust”. Be­ware that such a trans­fer will also af­fect your In­her­i­tance Tax and Cap­i­tal Gains Tax po­si­tion, although a gift of an as­set be­tween spouses will not cre­ate a tax charge at the time.

If they can af­ford it then a grand­par­ent gift­ing a small share of a ren­tal prop­erty down the fam­ily to share in the own­er­ship, and then split­ting the in­come in favour of the younger gen­er­a­tion can some­times be a usual plan­ning mea­sure if it saves tax as well, as the in­come could help to­wards sav­ing for their first house, for in­stance, or school fees.

Your prop­erty ren­tal may be let fur­nished or un­fur­nished. “Fully fur­nished” lets have a spe­cial al­lowance that you can claim. Gen­er­ally you can­not claim for the ini­tial cost of fit­ting out a fur­nished ren­tal prop­erty, and you claim for the cost of re­plac­ing con­tents as they wear out. But in­stead of this “re­newals” method you can get tax re­lief sooner by claim­ing the “10 per cent Wear and Tear Al­lowance” ev­ery year re­gard­less of what you re­place. This wear and tear al­lowance al­lows you to deduct 10 per cent of your rents (af­ter de­duct­ing such items as coun­cil tax and rates if you pay th­ese as land­lord) to cover “wear and tear” of soft fur­nish­ings in­stead, and aside from the tim­ing is of­ten worth more any­way. The wear and tear al­lowance cov­ers mov­able fur­ni­ture or fur­nish­ings such as beds or suites, televisions, fridges and freez­ers, car­pets and floor- cov­er­ings, cur­tains, crock­ery and cut­lery, cook­ers and wash­ing machines etc. How much of this do you need to pro­vide in your prop­erty for the al­lowance? You do not need to pro­vide ev­ery item, but you do need to pro­vide enough so that the prop­erty is largely ca­pa­ble of “nor­mal oc­cu­pa­tion” with­out the ten­ant hav­ing to bring in much of their own stuff.

If you are let­ting a room in your own home to a lodger you should con­sider tak­ing ad­van­tage of “Rent a Room re­lief”. The scheme ex­empts the first £4,250 of rent that you re­ceive, rather than you hav­ing to claim the ac­tual ex­penses that you in­cur such as a pro­por­tion of elec­tric, mort­gage, or re­pairs – though you can still use this method in­stead. Any ex­cess of rents over the £4,250 is tax­able in­come, but, on the other hand, you can­not deduct the ex­emp­tion from your ren­tal in­come to cre­ate a loss.

For you to qual­ify, your lodger may live in a sin­gle room and share some of the fam­ily rooms such as a kitchen and bath­room but you must be pro­vid­ing them with fur­nished res­i­den­tial ac­com­mo­da­tion, and not let­ting a room to some­one as an of­fice or stor­age. Gen­er­ally, the rooms should not be a sep­a­rate res­i­dence in their own right. So a per­ma­nent “granny flat” for in­stance that is self-con­tained and with its own ex­ter­nal doors would not be el­i­gi­ble. Sec­ond homes do not count ei­ther, as you must be liv­ing in the prop­erty for this re­lief.

Re­mem­ber when let­ting a room or prop­erty to check if your ren­tal agree­ment or mort­gage provider, and house­hold in­surer have any re­stric­tions over let­ting.

Rob Dur­rant-Walker is a tax con­sul­tant with char­tered ac­coun­tants Gar­butt & El­liott. He can be con­tacted via email rd­walker@gar­butt-el­liott.co.uk or on 01904 464100.

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