If you let out any portion of your property (including your home), the way you're taxed on the rent depends on the type of letting.
If, for example, you let your property out abroad, you'll have to pay tax on your overseas rental, whether you bring the money into the UK or not. However, if you've already paid foreign tax on this income, you can usually offset this against your UK tax.
Renting Investment Property (Buy to Let)
Here in the UK, HM Revenues & Customs treats investment property as running a business - even if you only let out one property. If you let out more than one property, they'll all be treated as a single business.
Whether you let one or several properties, you're taxed on the overall 'net profit'.
You work this out by:
adding together all of your rental income
adding together all of your allowable expenses
taking the allowable expenses away from the income
If you work out your net profit like this, you can offset a loss from one property against the profit from others. Your net profit counts as part of your overall taxable income.
The 'Rent a Room' scheme
If you are letting furnished accommodation in your own home to a lodger and your total receipts (rent plus income from meals, laundry service, etc) are £4,250 or below (£2,125 if letting jointly), you can get this income tax-free under the 'Rent a Room' scheme.
You'll have to pay tax on anything over £4,250. Or you can choose not to use the scheme if you'd prefer to pay tax under the rules for residential lettings.
Furnished Holiday Renting
The tax rules for furnished holiday renting are different from the rules for residential renting. The rules let you:
reduce your profit by claiming 'capital allowances' for the cost of furniture and fixtures that you provide inside the property you let
offset any losses against your overall income - not just against your rental income
Also, when you sell the property, you may be able to take advantage of extra reliefs that'll bring down your Capital Gains Tax bill.
Renting All or Part of Your Home
If you rent your home while you live somewhere else, your profits from the rent are worked out and taxed in the same way as above for residential renting.
The same rules apply if you let part of your home outside the 'Rent a Room' scheme.
If you let part of your home this way, you can include a percentage of household costs like gas and electricity when you work out your allowable expenses.
Make sure that if you let your property out, to keep records of your income and expenses for at least six years. HM Revenue & Customs can ask to see supporting information for your figures at any point during this time.
Remember… if your taxable income from rent is £15,000 or more in a tax year, you must declare it on the full Self Assessment tax return. If it's under £15,000, you may be able to complete a shorter four-page return. If it's under £2,500 your Tax Office may be able to collect any tax you owe through PAYE (Pay As You Earn) if you already pay tax this way.
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