Relief for landlords in let-out clause

Mike Goodman explains a tax concession that makes renting out your property an attractive alternative when selling is not

SETTING up home for two and dearly want to get rid of one of your singles pads? Letting is an alternative to selling for home-owners waiting for the recovery in the housing market, and especially for those with negative equity. Likewise, it can be a good option for thousands of former council tenants who exercised their right to buy high-rise flats but now find them unsaleable.

Reluctant landlords can take advantage of an important tax concession which came into force last April. Owners who rent out their property can claim the interest on the mortgage as an expense against rental income. Rental income is taxable, but by offsetting the mortgage interest you reduce the tax liability pound-for-pound.

You forfeit any mortgage interest tax relief (Miras) on the property but, as Miras is restricted to just 15 per cent of the interest on the first pounds 30,000 of the loan, most owners will be better off opting for the letting expenses concession.

In addition to the mortgage interest, owners can offset other costs against rental income. The main areas are marketing costs, agents' letting fees, buildings and contents insurance, maintenance, and such charges as water rates, if they are not paid by the tenants.

So if the mortgage on a flat costs pounds 400 a month and the rental income is pounds 440 net of expenses, tax is payable only on the pounds 40 per month "profit". Alternatively, were you to carry on claiming Miras, the tax relief would be pounds 30 a month at most. The bigger the rental income and mortgage, the bigger the benefit compared to sticking with Miras. For higher-rate taxpayers, the benefit is even greater, as the lower the "profit" on the rental, the lower the rental income liable to 40 per cent tax. Only interest on the original mortgage to buy the property is deductible against rental income. No further loan, for home improvements, for example will qualify. Owners who have let out their homes and opted out of Miras on their existing mortgages can still get tax relief on the mortgage on a new home.

Any losses made on lettingcannot be counted against the landlord's main income. But losses can be carried forward against any profit made on letting the following year. For example, if a tenant moves out during the tax year and there is a two-month gap in rental income at pounds 440 a month, then the total for the tax year will be only pounds 4,400. As the mortgage interest for the year totals pounds 4,800, there is a pounds 400 loss that can be carried forward.

A second home is liable for capital gains tax on sale. But the method of calculation means that few owners who let out a property which has fallen in value will be liable. The formula is based on the difference between the eventual sale price and the original purchase price, increased by inflation over the period. The gain is then apportioned between the time the owner occupied it as a principal residence and the period during which it was let.

Where there is an obvious loss, there is no indexation, but also no CGT liability. If a flat cost pounds 90,000 in 1988 and is now worth pounds 60,000, the original price is not indexed, but there is a potential pounds 30,000 loss. A loss on the sale of a property can be offset against realised profits elsewhere - on shares for example. So it might pay to realise profits on shares during the same tax year as the sale of the second home, if the loss on the property offsets gains on the shares to bring total gains for the year below the tax-free CGT allowance.

However, the CGT liability on inherited properties that are later sold is only calculated on the value of the inheritance when it passed to the beneficiary. If the beneficiary lives in the inherited property for a time, that also cuts the potential capital gains tax liability. Home-owners with negative equity who inherit a property that is free of a mortgage usually benefit in tax terms from moving to the inherited property and electing it as their main home for CGT purposes. They could then sell the former property at a loss and use the loss to offset any potential CGT liability on selling other parts of the inheritance, such as shares.

Home-owners who bought a council property under their right to buy will not be penalised if they later let the property. But if they sell within three years of purchase, they will forfeit the discount. And when calculating CGT, the original discounted purchase price is used as the base.

Whereas there are tax concessions for mortgage holders who let their homes, there could be complications with lenders. Lenders worry about tenants claiming long-term occupation rights should they have to repossess. But as current legislation allows for what are called shorthold or fixed- term tenancies, this should not be a problem. Normally lenders will increase the mortgage rate by 0. 5 per cent to 1 per cent if a property is let. But many waive this levy if the property is let temporarily to a family, a responsible couple or individual.

o The Inland Revenue and the Department of the Environment publish leaflets on the tax implications of letting a property. Local tax offices can advise.

Arts & Entertainment
tvGrace Dent on TV
Voices
Actor Zac Efron
voicesTopless men? It's as bad as Page 3, says Howard Jacobson
Sport
Emmanuel Adebayor, Tim Sherwood and Hugo Rodellega
sportThe latest news and scores
News
Brand said he
people
VIDEO
Voices
For the Love of God (2007) The diamond-encrusted skull that divided the art world failed to sell for
its $100m asking price. It was eventually bought by a consortium
which included the artist himself.
voicesYou can shove it, Mr Webb – I'll be having fun until the day I die, says Janet Street-Porter
Sport
Mercedes driver Lewis Hamilton of Britain drives in the rain during the qualifying session of the Chinese Formula One Grand Prix in Shanghai
sport
Extras
indybestFake it with 10 best self-tanners
Arts & Entertainment
Madonna in her music video for 'Like A Virgin'
music... and other misheard song lyrics
News
Much of the colleges’ land is off-limits to locals in Cambridge, with tight security
educationAnd has the Cambridge I knew turned its back on me?
Sport
Steven Gerrard had to be talked into adopting a deeper role by his manager, Brendan Rodgers
sportThe city’s fight for justice after Hillsborough is embodied in Steven Gerrard, who's poised to lead his club to a remarkable triumph
News
peopleOrlando Bloom the pin-up hero is making a fresh start
News
Who makes you happy?
happy listSend your nominations now for the Independent on Sunday Happy List
Life & Style
The North Korean TV advert for Taedonggang beer, that became a YouTube hit
food + drinkAnd what did it take to set up a taste test back in Wiltshire?
Arts & Entertainment
filmLife for Leslie Mann's can be challenging sometimes
Voices
For music lovers: John Cusack with his vinyl collection in 'High Fidelity'
voices...but don't forget rest of the year
News
The energy drink MosKa was banned for containing a heavy dose of the popular erectile dysfunction Levitra
news
Have you tried new the Independent Digital Edition iPad app?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

1st Line Helpdesk Engineer Apprentice

£150.00 per week: QA Apprenticeships: This company has been providing on site ...

Telesales & Sales Support Apprentice

£221.25 per week: QA Apprenticeships: This company is a well established Inter...

Client Relationship Manager - SQL, Python

£40000 - £50000 per annum: Harrington Starr: Client Relationship Manager - SQL...

**Financial Services Tax**

£35000 - £50000 per annum: Pro-Recruitment Group: Take your chance to join the...

Day In a Page

How I brokered a peace deal with Robert Mugabe: Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC

How I brokered a peace deal with Robert Mugabe

Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC
Video of British Muslims dancing to Pharrell Williams's hit Happy attacked as 'sinful'

British Muslims's Happy video attacked as 'sinful'

The four-minute clip by Honesty Policy has had more than 300,000 hits on YouTube
Church of England-raised Michael Williams describes the unexpected joys in learning about his family's Jewish faith

Michael Williams: Do as I do, not as I pray

Church of England-raised Williams describes the unexpected joys in learning about his family's Jewish faith
A History of the First World War in 100 moments: A visit to the Front Line by the Prime Minister's wife

A History of the First World War in 100 moments

A visit to the Front Line by the Prime Minister's wife
Comedian Jenny Collier: 'Sexism I experienced on stand-up circuit should be extinct'

Jenny Collier: 'Sexism on stand-up circuit should be extinct'

The comedian's appearance at a show on the eve of International Women's Day was cancelled because they had "too many women" on the bill
Cannes Film Festival: Ken Loach and Mike Leigh to fight it out for the Palme d'Or

Cannes Film Festival

Ken Loach and Mike Leigh to fight it out for the Palme d'Or
The concept album makes surprise top ten return with neolithic opus from Jethro Tull's Ian Anderson

The concept album makes surprise top ten return

Neolithic opus from Jethro Tull's Ian Anderson is unexpected success
Lichen is the surprise new ingredient on fine-dining menus, thanks to our love of Scandinavian and Indian cuisines

Lichen is surprise new ingredient on fine-dining menus

Emily Jupp discovers how it can give a unique, smoky flavour to our cooking
10 best baking books

10 best baking books

Planning a spot of baking this bank holiday weekend? From old favourites to new releases, here’s ten cookbooks for you
Jury still out on Manchester City boss Manuel Pellegrini

Jury still out on Pellegrini

Draw with Sunderland raises questions over Manchester City manager's ability to motivate and unify his players
Ben Stokes: 'Punching lockers isn't way forward'

Ben Stokes: 'Punching lockers isn't way forward'

The all-rounder has been hailed as future star after Ashes debut but incident in Caribbean added to doubts about discipline. Jon Culley meets a man looking to control his emotions
Mark Johnston: First £1 million jackpot spurs him on

Mark Johnston: First £1 million jackpot spurs him on

The most prize money ever at an All-Weather race day is up for grabs at Lingfield on Friday, and the record-breaking trainer tells Jon Freeman how times have changed
Ricky Gervais: 'People are waiting for me to fail. If you think it's awful, then just don't watch it'

Ricky Gervais: 'People are waiting for me to fail'

As the second series of his divisive sitcom 'Derek' hits screens, the comedian tells James Rampton why he'll never bow to the critics who habitually circle his work
Mad Men series 7, TV review: The suits are still sharp, but Don Draper has lost his edge

Mad Men returns for a final fling

The suits are still sharp, but Don Draper has lost his edge
Google finds a lift into space will never get off the ground as there is no material strong enough for a cable from Earth into orbit

Google finds a lift into space will never get off the ground

Technology giant’s scientists say there is no material strong enough for a cable from Earth into orbit