Money Matters: Subletting a shared ownership home

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A former shared owner / chartered accountant explains some hidden costs of subletting a shared ownership home

For a variety of reasons, including the cladding and fire safety scandal, some shared owners have been seeking permission from their housing association to sublet. As a general rule, many housing associations don’t allow subletting except in very rare circumstance defined as ‘exceptional’. Housing associations say this is to protect public funds, and ensure that people allocated affordable homes aren’t benefiting from ‘commercial gain’.

Assuming you’ve been given permission to sublet, it’s worth taking some time to research the topic thoroughly, and to assess whether it’s financially worthwhile. It may be challenging to plan to break even (unexpected costs are bound to arise, as our accountant explains below), so you’ll need to prepare carefully.

This feature focuses on costs you might not have thought about and the tax implications of subletting. But you’ll also need to consider other aspects such as gaining permission from your mortgage lender; likely to involve changing your current residential mortgage to a Consent to Let or Buy to Let mortgage. You should also be aware that there are myriad laws on residential lettings, which apply equally to ‘accidental landlords’ as to professionals with extensive property portfolios.

HMRC provide online help and support including webinars and Youtube videos. The Home Owners Alliance website includes useful information for accidental landlords. And another useful resource is The Accidental Landlord, a comprehensive guide written by property agent Daniel Lees and property journalist Martina Lees.

In the absence of being able to sell a shared ownership property, many people are asking for permission to rent out their apartments while they have moved elsewhere. Whilst renting out an apartment, or house, sounds relatively easy, we want to set out what you need to consider before embarking on this journey.

People who have obtained permission to rent out their shared ownership apartment tell us the housing association agreed on the basis that the shared owner doesn’t make any profit. You therefore need to ensure that all costs are considered when you set the price of rent – including tax impact, estate agent fees, one-off costs, insurance, and accountancy fees (if you need help with your tax return).

Taxation

Letting property is sometimes considered ‘easy money’. But over the past few years, the government has been phasing out tax benefits of renting out a property. 2021 was the first year where the ‘interest’ part of  mortgages couldn’t be deducted from income as an expense. (Instead it qualified for tax relief).

Let’s start with the basics of how income tax works when renting out your property.

Firstly, the tax year runs from 5 April each year. ‘Annual earnings’ means money you’ve made within this time period.

If you’ve got a job, you get taxed through your employer. Tax rates, thresholds and personal allowances are reviewed and updated from one tax year to the next. You can check these on the Gov.uk website.

The important thing here is that your ‘rental income’ will be added on to your wages for tax purposes.

If you earn less than £1,000 in the tax year from renting out your property – great news! You won’t be taxed. You get a £1,000 tax-free allowance on rental income.

If you earn between £1,000 and £2,500 in the tax year, the guidance says to contact HMRC. All being well, you probably won’t breach the higher rate tax bracket and you’ll pay 20% on anything above £1,000.

Realistically though, most people will be over £2,500 because many of the issues stopping you selling your shared ownership home won’t be a ‘quick fix’. Assuming you charge £500 per month rent, in a year you’re earning £6,000. Most will be quite a lot more.

But it’s not quite so simple and the good news is, most of your expenses can reduce your tax bill. The bad news is that you need to do a self-assessment calculation; you either need to do this yourself or get an accountant to help. We’ll show you the basics.

Renting out your home is like a mini-business. To look at tax, you need to do a taxable ‘Profit/Loss’ calculation because you’re only taxed on your profit.

• Income: amount you earn from someone paying you rent.
• Expenses: amounts you have to pay to rent out your apartment (excluding mortgage payments and ‘improvements’ to your apartment (not to be confused with maintenance)).

Re: mortgage payments, on your mortgage statements you will see ‘interest’ payments each month – 20% of that interest amount can be deducted as an expense but no more. Be careful not to confuse ‘interest’ payments with ‘capital’ or ‘repayment’ portions of the monthly mortgage payment.

Tax will be payable by online self-assessment each year by the 31 January in the year following the 4 April.

We found a handy tax calculator to help work out your tax – BUT you need to do your mini Profit/Loss to input expenses into the calculator.

Tip: leave yourself plenty of time to do this, as registration to set up your personal tax account on Government Gateway can take around a week; then you need to submit the self-assessment, and then pay the bill by 31 January.

Capital Gains Tax

Sorry, folks – there’s more tax! Another change which is brand new in 2021 is a reduction in the time period where you are allowed to rent out your flat and not pay any Capital Gains Tax (CGT).

Capital Gains Tax is the tax you pay on any profit you make if your property has appreciated in value in the time you have owned it. It doesn’t apply to your ‘main residence’, as you are allowed to have one property to live in. You do get an exemption from CGT if you sell your property within a timeframe of living there. In 2021, it reduced to 9 months of letting the property after you moved out when you will be due to pay Capital Gains tax on any profit above a specified threshold. Again check the Gov.uk website for current details.

Critically, if you sell an apartment which is your ‘Main Private Residence’ within 9 months of leaving, i.e. you live(d) there, you don’t pay Capital Gains Tax.

Insurance

Like many things in life, with a property things can go wrong! You normally buy home insurance; well, landlord’s insurance is critical if you are subletting. There are so many more things that could go wrong with someone else in your property that we would recommend buying a comprehensive package, including legal cover. During COVID-19 lockdowns, tenants who couldn’t afford to pay couldn’t be evicted. COVID-19 has affected many, but imagine if you were reliant on your rental income to pay for the place you’re now staying. A good insurance policy with legal cover would support you to understand your rights as a landlord and some policies offer an additional income loss (tenants’ default cover).

Like any insurance, different policies cover different things so it really pays to research this. And remember you can offset this bill against your tax bill.

Estate Agent Fees

You can assume things will go wrong. The microwave breaks down. A difficult, awkward lightbulb needs replacing. Your tenant can’t seem to work the heating. Your tenant misses a payment. If you’re quite handy, and live nearby, then you might not mind the all-hours phone calls from tenants. However, most people don’t want the hassle and so will ask an estate agent to provide management of the property alongside the marketing for rent. This generally starts at 10% of the rent plus VAT (if you’re lucky). We think it pays dividends not to have the hassle – and you can include the cost in your Profit/Loss.

As well as a monthly fee, estate agents will charge various one-off fees at the commencement of a contract including: professional cleaning, inventory check, tenancy agreement fee, and rent deposit registration.

Maintenance / Wear ‘n’ Tear

There are various landlord safety standards you have to meet, including an Electrical Installation Condition Report (EICR). An EICR checks whether your property’s wiring and electrics are safe, and must be carried out by a qualified electrician. If you rent out a property, you should have an EICR every five years (or sooner if specified in your most recent report). Depending when it was installed you may find that your consumer unit (fuse-box) doesn’t meet current standards for letting purposes, and needs to be replaced.

You also must have sufficient fire safety measures in place, including unobstructed escape routes, fire alarms and CO2 alarms where necessary. If your flat has gas, you’ll need a gas safety certificate too.

Where something breaks and you replace it like-for-like, you can deduct this from your tax Profit/Loss. But, say you need to spruce up your apartment to rent it out (new carpet, buying furniture, and so on), you don’t get to save tax on ‘improvements’. That’s just a loss for you, and it doesn’t class as a loss in your Profit/Loss. You’ll hopefully see the benefit of this if it increases the selling price; though, of course, you share that profit with the housing association.

Tip: Good for the planet and good for the purse – if you do need to kit out your apartment for renting it out your local charity shops may have great items of furniture at a fraction of the price! Wherever you choose to purchase furniture, make sure you understand fire safety regulations for landlords, and that your furniture has fire safety labels where applicable.

Other Fees

Some local councils charge a ‘licence’ fee to become a landlord. You may be charged a ‘sublet’ fee from your managing agent or housing association. Check your lease and make sure this is payable – if it isn’t written down anywhere in your lease contract then you shouldn’t pay it.

HM Land Registry

Don’t forget to let HM Land Registry know your new address if you sublet, so they have the correct details for any correspondence. You can use this COG1 form to inform them.

Updated 29 April 2022. Please bear in mind tax and regulation are subject to ongoing review and update. Please use this article as a guide only, and make sure to seek up-to-date professional advice as required.