SECOND-HOME owners who may be considering letting their property to generate some extra income should consider their tax position carefully, to avoid paying more than they need to.
Brits with holiday homes abroad should still remember that their income generated overseas would still need to be considered in relation to their UK tax position, said Leonie Kerswill, tax partner at PricewaterhouseCoopers. They may also need to file a return in the overseas jurisdiction, and ensure they are taking advantage of any agreements between the UK and other countries to mitigate paying excess tax.
Ms Kerswill said: “If it's an overseas holiday home you may need to file a tax return locally and pay tax in that country as well as in the UK - if so you can normally offset any foreign tax against your UK tax liability on the same income.”
Each of us has a set amount we can earn each year before paying tax – from April 2009 to April 2010 it is £6,035 – and if you have no other income and your rental income exceeds this level, then you could be facing the prospect of filling out a tax return for the first time.
Ms Kerswill said: “If you've never had to fill in a tax return before and your holiday home profits exceed your personal allowance then remember to tell HMRC that you need to complete a tax return - the deadline to notify them is October 5, after the end of the tax year. Don't be tempted not to tell HMRC - they are currently focusing on rental activity and non disclosure will lead to interest and penalties.”
To calculate your tax liability, you would first have to exclude certain expenses from your income, such as advertising costs for the letting, agent’s fees, and repairs, but only if they are classed as “maintenance” rather than improvements.
Ms Kerswill added: “In addition you can deduct a proportion of ongoing annual expenses e.g. insurance, light and heat, and mortgage interest. Remember though if you've got a repayment mortgage it's only the interest element of the payment that can be deducted.
“If you're deducting annual expenses then it's only the proportion that relates to the time the property is let, or available for letting but un-let.
“If the property is close enough to them, consider whether student children at home during the holidays might earn some income from cleaning or gardening at the holiday home. These payments - assuming they're appropriate for the work carried out - should qualify for a tax deduction against the rental income and should be tax free for the student unless he or she has other income which exceeds the personal allowance.”
By having a furnished property to let, you can add an additional deduction to cover wear and tear of the furniture.
Ms Kerswill said: “This is calculated as 10 per cent x (rental income minus a proportionate element of rates, eg council tax). If your holiday home qualifies as a furnished holiday let (FHL) then you may get tax relief against other income if you make a loss on the rental activity. There are certain conditions you have to meet for the property to qualify as an FHL - the key ones being that the property is available for letting for 140 days in a 12 month period - normally the tax year - and is let for at least 70 of those days of which not more than 31 consecutive days are to the same person. In addition the property has to be let commercially, so allowing family and friends to rent at less than market value wouldn’t qualify.”
Alison Steed is editor of www.mymoneydiva.com