Letting your own home and tax benefits

By: Robert Reid

Letting your own dwelling in Wales is becoming more and more common , isn’t it about time we got some breaks?! The current financial scenario means a lot of us are finding it hard to make ends meet, even with the latest fall in interest rates. Can the government be of any help ?
It has been some time since we were handed tax breaks for owning our own homes - remember MIRAS? (Mortgage interest relief at source - tax relief at basic rate, up to certain limits, was deducted from the mortgage interest we paid).
As a consequence we have to fund both interest and capital repayments out of our taxed income.
For instance you would need to earn 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.
As recession starts to hit and taking into account the difficult property market, we may consider letting either part or all of our houses . This article sets out a number of the tax considerations you will need to consider.
Rent-a-room relief
At this time you can elect to claim this relief if you let out a room in your house . The following rules should be thought of .
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).
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 not taken in to account .
(If your property is owned jointly the £4,250 will be shared between the partners, as will the rents.)
In most cases it will be necessary to figure out the tax charge using both methods to see which is more beneficial .
If the rents received from letting a room are not as much than £4,250 per annum (£354.17 per month) the income is completely 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 home 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. Then if you do not let for more than three years there will be no capital gains tax to pay.
If part of the gain becomes taxable because of the home being let as residential accommodation, then you can also make a claim for lettings relief of up to £40,000. 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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This article was written by Robert Reid on behalf of PKB Business Solutions Group, expert accountants, specializing in Taxation and Business Development

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