Is Rent paid in a rent-to-rent agreement tax deductible?

[Dubya]

Hello
I am considering renting a friends flat under a management agreement that will allow me to market it as a short term let (holidays, airbnb etc). We have agreed most things and ticked all the boxes with insurance, lease restrictions etc. I cannot find out on the internet if the rent I pay to my friend (I mean landlord!) is an allowable expense to offset against the turnover. I am a sole trader with one property already on STL market (via Airbnb) and that is classed as a Furnished Holiday Let for tax purposes. The mortgage payments are tax deductible. Will my rent payments on prop 2 be tax deductible/allowable expense? Many thanks

 

[Gyumri]

It seems to me from a non-accountants point of view that you are entitled to deduct your rent payments from the rent you receive as a "revenue expense".

However, it might be better to regard your relationship to your friend as a managing agent if you are not really renting the flat yourself.

In that sense you are simply receiving rent on behalf of your principal and passing it on less your agency fee.

 

[Dubya]

It seems to me from a non-accountants point of view that you are entitled to deduct your rent payments from the rent you receive as a "revenue expense".

However, it might be better to regard your relationship to your friend as a managing agent if you are not really renting the flat yourself.

In that sense you are simply receiving rent on behalf of your principal and passing it on less your agency fee.

Ah, that makes sense. It will be a 'Management Agreement' so I think you are right that I am passing on the rent received but the extra is my fee. Hopefully an accountant will be along soon to clarify. Thanks very much for taking the time to reply.

 

[AndreasC]

When you market the property who are the end customers renting from?

With a letting agent it is clear that they are marketing the property on behalf of someone else and that any tenant is paying rent to the landlord and the agent is just getting a fee.

If they are renting from your friend then you are a managing agent (providing a service) so you would pass on the rent and retain the letting fee. The trading allowance would be available to you https://www.gov.uk/guidance/tax-free-allowances-on-property-and-trading-income#trade

If you are renting from your friend and you are subletting/reletting it to others then the rents are income and an expense (rent to rent).

 

[Dubya]

When you market the property who are the end customers renting from?

With a letting agent it is clear that they are marketing the property on behalf of someone else and that any tenant is paying rent to the landlord and the agent is just getting a fee.

If they are renting from your friend then you are a managing agent (providing a service) so you would pass on the rent and retain the letting fee. The trading allowance would be available to you https://www.gov.uk/guidance/tax-free-allowances-on-property-and-trading-income#trade

If you are renting from your friend and you are subletting/reletting it to others then the rents are income and an expense (rent to rent).

Thank you Andreas. I would market the property as a holiday let (airbnb, holiday cottages etc). I would pay the property owner a fixed monthly rent under a Management Agreement that allows me to use it as a holiday let. There will be no relationship between the owner and the guests. I understand that this is very common with commercial property. My question is.. 'is the rent that I pay to the owner, an expense that I can claim to offset my tax bill, just as mortgage payments are for owners of furnished holiday lets' ? - Many thanks

 

[AndreasC]

Thank you Andreas. I would market the property as a holiday let (airbnb, holiday cottages etc). I would pay the property owner a fixed monthly rent under a Management Agreement that allows me to use it as a holiday let. There will be no relationship between the owner and the guests. I understand that this is very common with commercial property. My question is.. 'is the rent that I pay to the owner, an expense that I can claim to offset my tax bill, just as mortgage payments are for owners of furnished holiday lets' ? - Many thanks

Yes it's an expense

 

[Paul Kelly ICHYB]

For clarification, what do you mean by 'tax deductible'?

I ask because it is one of those terms that is thrown around but doesn't really mean anything on its own!

 

[Dubya]

For clarification, what do you mean by 'tax deductible'?

I ask because it is one of those terms that is thrown around but doesn't really mean anything on its own!

Yes, I did wonder myself how to phrase it. What I mean is, can I allocate the rent I pay to my expenses so that it reduces my profit prior to tax being computed. E.g. with my old Ltd Company I would be taxed on turnover less various expenses and costs, i.e taxed on profit. As I am now a sole trader will I be allowed to claim my rent paid as an expense to reduce my tax bill. I'm not a business guru and find this all a bit complicated but I have an entrepreneurial spirit and would like to make this rent-to-rent deal work for me. So in this case I would like to claim the rent I pay as an expense just as I will with the utility bills, cleaning, internet etc. I did look at opening a Ltd C. to run this through but I think it's not worth it unless profits are around 50k. My profits will be around 10k per annum. But I have other irons in the fire with similar poptential deals to be done. Maybe I should start the Ltd Co now in anticipation? It looks like I need business advice too!! Thanks for your attention

 

[Paul Kelly ICHYB]

OK, you don't claim anything.

• You list all of your costs/expenses
• You list all of your sales.

The difference between the two is your profit, which you are taxed on, as self employed!

As you need to rent the property to rerent it, it is a cost of business.

Also, it might be an idea to have a chat with an accountant - many give 30/60 minutes for free. Remember, a good accountant is not a cost to your businesses, they are a saving!

 

[Gyumri]

Maybe I should start the Ltd Co now in anticipation?

I would say definitely in order to protect you personally. I think it costs about £15 to register an Ltd?

You can't buy any insurance for that sum!

 

[Dubya]

OK, you don't claim anything.

• You list all of your costs/expenses
• You list all of your sales.

The difference between the two is your profit, which you are taxed on, as self employed!

As you need to rent the property to rerent it, it is a cost of business.

Also, it might be an idea to have a chat with an accountant - many give 30/60 minutes for free. Remember, a good accountant is not a cost to your businesses, they are a saving!

Thanks. Are you an accountant

I would say definitely in order to protect you personally. I think it costs about £15 to register an Ltd?

You can't buy any insurance for that sum!

I'm soeaking to an advisor tomorrow.

I would say definitely in order to protect you personally. I think it costs about £15 to register an Ltd?

You can't buy any insurance for that sum!

 

[Dubya]

I'm speaking to someone tomorrow to advise me, thanks to you and Paul ??

 

[Gyumri]

Thanks. Are you an accountant

I'm soeaking to an advisor tomorrow.

You can register a company online at Companies House. The process is simple. Choose a company name, name the directors, shareholding could be 1 share for £1 or any number of shares .

 

[AndreasC]

You can register a company online at Companies House. The process is simple. Choose a company name, name the directors, shareholding could be 1 share for £1 or any number of shares .

Don't do 1 share for £1 as it limits tax planning later on. Do 100 shares for 1p each or 1,000 at 0.1p. It's the same overall affect but gives flexibility. Do speak to an accountant to get this right

 

[Bobbo]

The mortgage payments are tax deductible.

Assume you mean the mortgage interest is tax deductible... any element of payments reducing the outstanding mortgage is very much not tax deductible.

 

[Stedurham]

Hello
I am considering renting a friends flat under a management agreement that will allow me to market it as a short term let (holidays, airbnb etc). We have agreed most things and ticked all the boxes with insurance, lease restrictions etc. I cannot find out on the internet if the rent I pay to my friend (I mean landlord!) is an allowable expense to offset against the turnover. I am a sole trader with one property already on STL market (via Airbnb) and that is classed as a Furnished Holiday Let for tax purposes. The mortgage payments are tax deductible. Will my rent payments on prop 2 be tax deductible/allowable expense? Many thanks

Does the lease and mortgage company allow short term lets like air b n b most don't. Also if its in london there the 90 day rule

 

[Paul Kelly ICHYB]

Thanks. Are you an accountant

No, I am not.