Maximising deductions from renatl income

heleen

Hi there

I am strugglign with something and was hoping one of you tax savvy people could advise.

I have a property I rent out for holiday lets and when vacant I use it myself. We get very few bookings and in fact will ikley fall below the holiday let requiremetns for tax and just be treated as normal rental income.

Within these rules it says that you can deduct all your financing, maintenance etc costs from the property - BUT you have to adjust for the fact that you use it yourself.

Now say I rent it for 50 days per year and use it for 50 days per year and it is vacant the rest of the time, how would I know how muh of the costs I can deduct?

Is it:

= total cost minus (total cost/365 * 50) which is the cost for all the time that I am not in it (therefore either rented or vacant)

or

= total cost /365 * 50 which is cost of the number of days that it is rented only. (seems ahrsh to be penalised for not havign a successful business)

or

= total cost / 2 as when it's occupied, 50% of the time it's by me.

Any help greatly appreciated.

We're hoping to get as much relief for maintenance and mortgage interest so that we have a net loss.

But I need to understand the above to know whether it's worth operating it fully as a business and then paying rent every time we go so that we can deduct 100% of costs (but we've paid rent).

Thanks

heleen

GARDINER

This may help
http://www.hmrc.gov.uk/manuals/pimmanual/PIM2105.htm

heleen

Thanks, that does help but sadly it still seems to leave it up to me to decide what's "FAIR".. which is where I struglgle. Would love to hear which of above 3 scenarios one would consider NOT fair.

Heleen

GARDINER

HMRC site states
'You don’t have to split the interest if the taxpayer is genuinely trying to let the property but it is empty because they have not been able to find a tenant. In this case the interest will meet the ‘wholly and exclusively’ test. It won’t meet this test if they have not been trying to let the property or they have been using it for private or non-business purposes '.

This means that if you have genuinely been trying to let the property then the full interest is allowable less your personal use of 50 days.

(I am a former HMRC employee)

You will get differences of opinion between offices but as long as you stick to your guns and provide proof of advertising etc then there shouldn't be a problem if an investigation into the Return is opened. Not all Returns are investigated.

heleen

Thanks - it's nice to have someone with inside knowledge!

Now that you can't deduct losses from your other income, it's less of a problem becasue I don't think I'll ever rent it out so much that it becomes a problem.

I do try though, and have the advertising fees to prove it.

I think I might go for 140 days for business use, which is the minimum i need to make it available (though in practice it's available a lot more) for it to be a business council tax wise.

Thanks again.

GARDINER

Heleen

I don't think you are correct when you say the losses cannot e set against other general income - see

http://www.hmrc.gov.uk/manuals/pimmanual/PIM4130.htm

which refers to legislation at
<LI class=filledcircle>ITA07/S127 (3) for IT cases (for 2007-08 onwards).
Hope this helps

heleen

The issue is only holiday let losses can be set off against income and despite making it sufficiently avaiable and advertising (though not excessively) I am unlikely to meet the 70 days rented rule.

However, since you appear to have such a good understanding of this - how would it be looked upon if I did the following

- I consider the house to be 100% business, thereby deducting all costs from income

- I rent it out to 3rd parties as per usual (which in practice is likely to be <70 days)

- I pay to use it when we are up, with a genuine market rate of say £250 per 3 day weekend (for perspective I sell weeks at 650 and 500 in low season).

It says that holiday lets are to the public and exclude cheap self use and freinds and family but if I pay a market rate, then surely that would be fine?

Would allow me to class the property as holday let and would probably make a 3-4k loss. The risk is that if I start using it more, then I end up with a taxable profit from money I've paid myself! But not likely.

Heleen

GARDINER

Hi Heleen
There doesn’t seem to be any definitive guidance on the situation that you are in and so this is my interpretation.
We have established that the rental income cannot be treated as Furnished Holiday Lettings because the property has not been let for 70 days. This then means it is treated as normal furnished letting income.
The Act http://www.opsi.gov.uk/acts/acts2005/ukpga_20050005_en_15#pt3-ch6-pb2-l1g325
states that the property has to be let to the public and so even if you ‘pay’ the full rent when you use the property, those days do not count towards the 70 days. There is therefore no point in you paying the rent when you use the property.
It follows then that there would need to be an apportionment of the expenses in accordance with the rules. PIM2220 http://www.hmrc.gov.uk/manuals/pimmanual/Index.htm
uses an example of a holiday home let commercially some times and at other times let free to others i.e you.
I feel that the property is still a holiday home regardless of the fact that the rents are not treated as FHL.
PIM2220 also says in this respect ‘apportion on a reasonable basis’ although there is no definitive guidance about what is reasonable.
PIM2105 states that the expenses do not have to be split if the owner is genuinely trying to let the property for the whole year, but that still doesn’t negate the requirement to apportion for the periods of free use by you.
I would suggest that you either split the expenses 50/50 (based upon your example of equal days let/private use.
OR
Expenses x 315/365 = the business element. (based upon 50 days private use)
The other alternative is to deal with the question of expenses allowable, under PIM2220 on a ‘not commercially let’ basis and simply deduct expenses up to the level of the rent and declare a no profit/loss situation on the grounds that without incurring the expenses you would not have received the income. This would counter any argument by HMRC that the only expenses allowable, when a property is not commercially, are the expenses incurred during the time the property was let at a commercial rent.
As you are unable to relieve the losses against general income this may be the easiest solution. Certainly if the lack of bookings continues into following years HMRC may view this as a more reasonable calculation.

chappers

GARDINER wrote: »

simply deduct expenses up to the level of the rent and declare a no profit/loss situation on the grounds that without incurring the expenses you would not have received the income. This would counter any argument by HMRC that the only expenses allowable, when a property is not commercially, are the expenses incurred during the time the property was let at a commercial rent.

Was going to suggest that as there is nothing to be gained by having expenses above the income, unless you think in future years the income may excede the expenses, then you can carry losses forward to those years.

Alternatively could you not market the property a bit more vigoursly and actually make yourself a profit

Elaine_Wilson

Just thought I would add a comment about the original question of calculating a fair poportion of expendses to charge against the rental income.

You do not have to use the same method for all expenses incurred. This is probably why no formal guidance is given.

For example, nortgage interest would be best apportioned in the ratio 315:50 as confirmed by other posters above. This is because you are still running the business while you are trying to let it, even if it is vacant.

But there will be some expenses where the 50:50 split might be appropriate. An example could be replacement of crockery, or the cleaning of bed linen. These costs are only incurred whilst the property is in use so ignoring the empty periods might be considered fair.

Other costs could be calculated as a mixture of the two. A prome example here would be heating costs. If you keep the property at a minimum temperature when it is empty then the cost of this would be incurred throughout the year. The extra costs of heating to a comfortable level could be apportioned on the basis of occupation.

The figures will rarely warrant that third method but I think you should be aware of the reasoning behind it.

chappers

Indeed as with any taxation it's always a grey area when splitting costs between business and personal use, it's all down to how far you want to push it how confident of your position and how willing you are to stand your ground in the event of a dispute between yourselve and HMRC.
This area of taxation is always filled with statements such as "reasonable", "fair" and "acceptable" and rarely with finite limits or amounts.Two people at HMRC may even have different interretations in these areas.
I think it was fengirl who said in another topic a while ago if you honestly think an expense is a genuine business expense then claim it as such.

With regards to such things as mortgage, utility bills, etc then deduct proportionately.for example if at the end of the year it turns out you stayed in the property for 50 days of the year then set 315/365 days as business expenses against those things, whereas things such as advertising set 100% against income. Things like linen etc if you have to clean the linen after a let then claim it if you have to clean the linen after you have stayed there then don't.

Things that you may benefit from though are things like replacing furniture, where if it is holiday let you can claim for a proportion of the capital cost whereas if a residential let then just wear and tear, this would obviously only apply if you let over the required number of days to class as holiday let.