What are the costs of renting out your house?
Renting out property is popular in the UK, with Brits often doing so to top up their salary. In some cases, owning multiple houses can even become a sole source of income. However, while there are clear and obvious financial benefits, what are the costs attached to renting out your house?
There’s often uncertainty around this very concern, so we’ve outlined the cost of renting out your home privately, whether to long-term tenants or as a holiday home. Reading on, discover the tax implications of being a landlord, whether you should be paying national insurance on your profits, and whether landlord insurance is really worth it.
In this article:
- Renting out a house checklist: the tax implications
- The cost of renting out your home as a holiday letting
- What is the cost of renting out a house if property is your main source of income?
- Renting out your house to a lodger
- The added cost of landlord insurance
Renting out a house checklist: the tax implications
There are plenty of positives that come with collecting income from a rental property, but it’s important to understand the tax implications that you may also be liable for. Similarly, you should be aware of any tax relief you are eligible for.
We’ve outlined how you may be impacted by income tax and how you can make the most of the property allowance.
Income tax when renting out your house
Renting out your house brings in money, and, as such, is treated as taxable income. This means the total annual rent you earn is added to your salary when working out your overall income tax for the financial year, and you must declare it on your Self-Assessment. This is especially important to remember if your rental income pushes you into an upper tax bracket.
However, there are some instances where you can offset your tax, including:
- A portion of your mortgage interest payment (as of April 2020, you are eligible to 20% of your mortgage payment as tax-credit).
- Letting fees.
- Maintenance cost of renting out a house (general upkeep and repair, cost of cleaner and gardener, etc).
- Utilities (water, gas, electricity).
In each instance, you are able to deduct the above costs before declaring your overall taxable income.
Tax-free property allowance
While rent is treated as taxable, landlords are granted up to £1,000 annual tax-free income, thanks to the property allowance.
This means that if you earn less than £1,000 on property, you aren’t obliged to declare rental income at all. Otherwise, you should inform HMRC of your rental earnings, and they’ll deduct your property allowance from your taxable earnings.
It’s worth remembering that, if you claim your property allowance, you won’t be able to claim for any other allowable expenses, such as maintenance costs and utility bills.
The cost of renting out your home as a holiday letting
Holiday letting can be a lucrative business, and earn you thousands of pounds seasonally. In fact, a landlord can earn up to 30% more through letting their home out to numerous guests over a holiday period than to a single long-term tenant. This, however, is dependent on popularity and whether your home is impacted by peak periods.
However, what’s certain is the upkeep cost of renting out your home as a holiday let. Because of the quick turnover of guests, you’ll have to maintain a consistently high level of care, as though maintaining a show home. While some elements require more regular care than others, examples include:
- A deep clean and tidy after each visitor
- Topping up amenities such as toiletries.
- Washing bedding and towels
- Checking the electrics are in safe working order
- Maintaining the garden
Similarly, as a holiday landlord, you will be liable for common household costs that would otherwise usually be taken care of by a permanent tenant. For instance, you should keep on top of:
- Utilities: water and energy
- TV and broadband
- Electrical safety
- General upkeep, including painting and decorating
- Damp and mould
What is the cost of renting out a house if property is your main source of income?
While simply renting out a second home can nicely top up your salary, if you make a significant amount of money through property, you may have to pay national insurance, much like other UK businesses. This is more often the case for people who manage multiple tenants or substantial holiday letting.
However, to offer clarity, we’ve highlighted what constitutes running a property business. You will have to pay Class 2 National Insurance if:
- Your property profits are £6,475 or more per annum.
- Being a landlord is your main source of income.
- Your collect rent from two or more properties.
- You buy with the intention of renting out your home privately.
Calculating the cost of renting out a house, though, is relatively straightforward. Fortunately, because property income falls into the Class 2 National Insurance bracket (the rate issued to self-employed workers), you will only be obliged to pay £3.05 per week (as of 2020-2021).
Renting out your house to a lodger
Renting out a second home to permanent tenants or seasonal holidaymakers is the more obvious description of ‘renting out your house’. However, you may have vacant rooms in your current home that you’d like to make a little money off.
So, it’s important to understand the monetary responsibilities you may be faced with if you are considering taking on a lodger:
- Council tax
If you’re currently living alone, you’ll benefit from 25% council tax. However, this will change when you take on a second resident. You should factor increased council tax costs into your budget when laying out your lodger’s rent.
When welcoming a lodger, you should research whether their possessions are covered by your current insurance. If not, adding them to your package may increase your premium. Alternatively, you could look into single room contents insurance. Again, you should factor this into their rental agreement.
The added cost of landlord insurance
Landlord insurance isn’t a legal requirement, but should be considered by any good landlord. Importantly, regular home insurance doesn’t usually cover rental properties or wilful damage caused by tenants. This may be especially prudent if you’re renting out your home privately to students.
The average annual cost of landlord insurance in the UK is generally between £200-230, depending on the type of cover you’re looking for. Landlord insurance will cover you in the event of:
- Content damage, loss, or theft.
- Damage to the property.
- Any claims made against you in the event of a tenant or guest incurring injury, or their personal property being damaged or stolen.
Landlord insurance doesn’t always include rent guarantee insurance, however, which protects you against the cost of unpaid rent. It’s worth checking with your provider whether they issue it as standard, but this additional cover will usually cost an extra £60-80.
Letting out a second home or room can be quite the earner, but it’s particularly important to know the cost of renting out a house when budgeting. Head to our blog for even more expert tips and regular property advice.