Housing fall brings lettings to the fore

Jul 01, 2008

IT IS one of the curiosities of life that when house prices fall, the first area to see increased activity is lettings.

People who have found a new home may be reluctant to sell their old one at a loss and many house hunters seem to be happier with the ‘safe’ option of renting rather than buying a property which may fall further in value.

So of what do new landlords need to be aware when venturing into the lettings business?
Mortgage interest is deductible against the letting income and not only for pre-existing borrowing. An owner who is starting to rent out a property for the first time can claim tax relief on borrowing up to the current value of the property, not just the original cost or the existing mortgage.

Therefore anyone buying a new home and letting their old one would be well advised to consider maximising borrowing on the let property instead of simply taking out a non-deductible loan on the new house.

Where capital gains tax relief is concerned, a property that has been changed from owner-occupation to letting will qualify for relief from capital gains tax for the period in which it was occupied as principal private residence.

Also, the final 36 months of ownership, regardless of whether it is re-occupied as PPR plus (if re-occupied after being let out) gains of up to £40,000 attributable to the letting period. If the property is held jointly, these reliefs can be even more valuable.

The gain is apportioned on a time basis between the periods qualifying and not qualifying for principal private residence relief. The interaction of the lettings relief, if applicable, can be complex, so it is worthwhile taking advice.

Regarding holiday or residential lettings, most lettings will be treated as part of a lettings business (i.e. an investment) but note that property letting does not qualify as savings income for the purposes of the ten per cent income tax savings rate.

However, if the property is rented out on a series of commercial short-term lets, none of which is for more than four weeks, it may qualify to be treated as a furnished holiday letting.

The two are broadly treated in quite similar ways but FHLs enjoy additional advantages including the fact that if, in future, the property is sold and replaced by another FHL property, any gain can be rolled over for CGT purposes. Furthermore any losses from a FHL can be set against other income in the year they arise whereas losses from a residential lettings business can only be offset against similar income in the same or future years.

When working out the profit on a lettings business, it is important to deduct all the expenses that can be claimed. Interest on the borrowing is allowable as well as other costs such as repairs, insurance, management fees and allowances based on the cost of equipment purchased for use in maintaining the property.

What cannot be claimed are the costs of getting started with letting, such as initial advertising expenses and the legal fees associated with creation of the first lease.

For more information or assistance, telephone 01908 687800, e-mail mail [email protected] or visit

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