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The tax treatment of this income is outside the scope of this book and only brief details can be given here. A helpful tax concession is the ability to rent out a room in your own home and pay not tax. The Lloyds TSB Tax Guide 2002-3 gives fuller details of the Rent-a-Room scheme and the taxation of income from property.

If you run a hotel or guest house, your income will normally count as earnings from self-employment and be taxed as described. With the rent-a-room scheme you can let out furnished rooms in your home and as long as the total rent you get during the year is not more than ?4,250 in 2002-3 (before deducting any expenses), you don’t have to pay to on that income. If you let the room out jointly with someone else, each of you will be able to get ?2,125 tax-free.

If you receive more than ?4,250 for the room you have a choice. You can either:

  • ? pay tax in the normal way (after expenses) on the total profit you make from letting the room or
  • ? pay tax on the amount of rent over ?4,250 (or ?2,125 if letting jointly) without deducting any expenses.

It’s your choice and you should work out which method of taxation leaves you with the smaller tax bill. You can work out this sum for each tax year and change the method each year as long as you tell your tax inspector within one year of the end of the tax year. As a rule of thumb, if your gross rent is just over ?4,250 and your expenses are low, you will probably be better off paying tax on the gross rent less ?4,250.

IF YOU LET PROPERTY

Income from lettings of all type is pooled and treated as a single source of income for tax purposes. You are taxed on the amount of this type of income you get during the tax year. In working out how much income you pay tax on, you use normal accounting rules and can deduct expenses – including interest on a loan to buy the property – in the same way as if you were running a business. However, you can’t normally claim capital allowances for equipment and furnishings you provide. Instead, you can claim an allowance for wear and tear. This is based either on items you have actually replaced during the year – called the renewals basis – or on a proportion (usually 10 percent) of the rents you get less council tax and water rates. You choose which basis to use.

Although your income from letting property is now treated in a similar way to earnings from a business, it still counts (as in the past) as investment income. This means, for example, that you can’t use this income for making tax-efficient payments to a pension plan. However, see below for the special treatment of furnished holiday lettings.

You can now claim 100 percent capital allowance for renovating or converting vacant or underused space over shops and other commercial premises to provide flats for rent. To quality the property must have been built before 1980, have no more than five floors and the upstairs part must have originally been constructed primarily for residential use.

IF YOU LET FURNISHED HOLIDAY ACCOMMODATION

If the property (including caravans) is let as furnished holiday accommodation for part of the year the income will be treated as earned income, subject to certain conditions. This means, for example, that you will be able to get tax relief on these earnings for pension payments and you can get capital allowances for what you spend on equipment and furnishings you buy and use in your letting.

To be treated as earned income the property must be available for letting to the general public at a commercial rent for at least 140 days in any twelve-month period. It must also be let out as living accommodation for at least seventy of those days and not normally occupied by the same tenant for more than thirty-one days at a stretch during a seven-month period.

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