Tax-free cash for those who let a room in their home
5th June 2008Profit from summer property rentals
Whether it's Ascot, Wimbledon, the Henley Royal Regatta or Twenty20 cricket, this summer, a flood of people will descend on the south-east, keen to attend the country's landmark events. Also visiting will be numerous overseas students looking to learn English. While some of these visitors will stay in hotels, many will want to stay in a family home.
Geoff Everett, tax director at investment management and financial services group Smith & Williamson, points to tax rules that mean homeowners can earn up to £4,250 a year tax-free by renting out a room(s) in their home.
"For the higher-rate taxpayer, this is equivalent to pre-tax earnings of £7,083 a year," says Everett. "Moreover, letting rooms in this way does not affect the capital gains exemption for owner-occupied properties."
Rent-a-room relief only applies where someone lets out rooms in their own home.
However, significant capital gains tax (CGT) breaks can apply where a property which has been let out has been, or becomes, the main residence.
That means people who buy property to rent out, but at some stage live in it as their main residence, should be entitled to benefit tax-free from any rise in the value of their property for up to three years. For example, if someone owns a property for five years, rents it out for four years, and lives in it for the last 12 months, they would not have to pay CGT for the last three years' ownership.
Although CGT is now only charged at a flat 18% (up to 40% before 6 April 2008) the tax break can still save thousands of pounds, especially when the annual CGT allowance of £9,600 is taken into account. To demonstrate, if two people own a property jointly, they would benefit from tax-free gains of 2 x £9,600, or £19,200, before they are liable to pay any tax.
On top of that, where a property has been used as the main residence at some time during ownership and let for part of the time, each owner can claim a tax-free lettings allowance of up to £40,000. So, in addition to the annual CGT allowance, the property, or an individual's share in it, could rise in value by another £40,000 before tax becomes due on the gain.
For further information, contact:
Geoff Everett, tax director
Tel: 020 8492 8770
E-mail: geoff.everett@smith.williamson.co.uk
PR enquiries:
Layisha Laypang, tel: 020 7131 4550
Kate Harrison, tel: 020 7131 4228
Disclaimer
By necessity this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Article correct at time of writing.
Note to editor
Smith & Williamson is an independent professional and financial services group employing over 1,400 people. The group is a leading provider of investment management, financial advisory and accountancy services to private clients, professional practices and mid-size corporates. It operates from offices in London, Belfast, Bristol, Glasgow, Guildford, Maidstone, Salisbury, Southampton and Worcester.
Smith & Williamson Limited
Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International, a worldwide network of independent accounting firms.
