Tax planning for residential investment property pays off
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 firstname.lastname@example.org or on 01904 464100.