Many landlords find themselves owning more than one property by accident rather than design, perhaps from an inheritance or by not being able to sell a previous home when moving house. Generating income from the letting of the additional property seems like a good idea but beware of the tax man as he will want to take his share.

Lorna Sizer (2)The letting of property should be viewed in the same way as running a business, with a separate bank account being used for the rental income and expenses relating to the let property. This will make it easier to work out the annual profit from the letting. The usual overhead running costs of the property can be set off against the rental income if paid by the landlord such as insurance, council tax and utilities (water, gas and electricity), together with the costs of repairs to the property, replacement of any items damaged by the tenants, cleaning and any other expenses relating to the letting.

One important decision is whether to deal with the letting yourself or appoint an agent to manage the letting for you. An agent will charge a monthly management fee which is tax deductible and will take over dealing with the tenants which can be time consuming.

It is a common mistake to think that the whole of the mortgage repayments can be set off against the rental income. Tax relief is limited to the interest element of the monthly mortgage payments and any capital repayments will not count. The tax relief on the mortgage interest is going to be restricted from next year which may mean that your tax bill increases from the 2017/2018 tax year.

You will need to register with HMRC to complete annual tax return forms if your rental profit for the year (rental income less allowable expenses) is at least £2,500 or if the annual rental income is £10,000 or more before deducting any expenses.   

Where the property is owned jointly with someone else then the rental profit will be split between the owners in the same proportion as their ownership of the property. HMRC assumes that the income is to be split equally between married couples even if they own the property in different proportions, although an election can be made for the income to be split in proportion to the actual ownership by the couple if preferred.

Landlords have responsibilities towards tenants by making sure that all gas and electrical equipment is maintained and checked annually, providing an Energy Performance Certificate, fitting smoke alarms together with carbon monoxide alarms and generally keeping the property free from health hazards.

Another way to earn money from property is to rent a room in your home to a lodger. Rental income from a lodger is tax free up to £7,500 each year (ie £625 per month). Any rental in excess of £7,500 is taxable without any deduction for expenses and should be advised to HMRC.

There are scores of accidental landlords in Sussex due to our thriving student and tourism economies. It is worth noting the tax implications and seeking advice if you’re unsure.

Lorna Sizer, Senior Manager, Knill James Chartered Accountants