Tax Strategies for HMO and Multi-Let Property Investors

Investing in multi-occupancy property as an individual or through a limited company can be a lucrative option. However, it is crucial to understand the tax treatment of houses in multiple occupation (HMOs) and multi-lets to maximise reliefs available and mitigate potential tax liabilities. This in-depth guide explores various tax strategies and considerations for HMO and multi-let property investors in the UK.

What are HMOs and Multi-Lets?

Houses in multiple occupation (HMOs) or ‘multi-lets’ are properties let out to more than one household, such as students, young professionals, or singles. A multi-let may or may not be classed as an HMO, depending on factors like the number of bedrooms, stories in the building, and the tenants themselves. The definition can vary between local authorities, and all HMO owners must be properly licensed. Failure to obtain an HMO license can result in criminal punishment.

Investing in HMOs and Multi-Lets

HMOs and multi-let investments generally offer a higher rate of return than traditional residential buy-to-let properties. Earning a decent income from a handful of HMOs is possible instead of many more single-let buy-to-let properties. However, you may not realise the same level of capital gains as a non-HMO property.

Income Assessment

The cash basis is the default method for most property businesses run by individuals or partnerships with an income of £150,000 or less for a tax year. For companies, rental income and expenditure are assessed as trading income, and the same tax treatment applies to HMOs and multi-lets.

Renovation Costs

HMOs and multi-lets often require refurbishment and structural work to optimise rental capacity and meet local market standards. Most spending on HMOs or multi-lets may be regarded as a revenue cost, qualifying as either a corporation or income tax deduction. Capital items, such as extensions or structural changes, are added to the acquisition cost for capital gains tax purposes.

Determining the boundary between repairs and improvements can be challenging. HM Revenue and Customs (HMRC) has clarified that expenditure that changes the character of the thing being repaired must be classified as a capital improvement, not a repair. Therefore, if an HMO or multi-let property is initially incapable of being let, any necessary work to place it in a fit state to be let on the open market is unlikely to qualify as a deduction against rental income.

When work combines capital and revenue and is carried out simultaneously, HMRC accepts a reasonable and fair apportionment. Thus, it is essential to maintain good records of any expenditure, summarised and receipted. We recommend:

• Taking photographs of any work carried out at its various stages
• Asking tradesmen to provide a breakdown on their invoices (e.g. ‘build extension’ or ‘decorate existing property’)
• Keeping a copy of the property survey report

Capital Allowances

Unlike most single-let properties, you can potentially claim ‘Plant & Machinery Capital Allowances’ on HMOs and multi-lets. A tax deduction can be claimed on qualifying items within the communal areas of HMOs & Multi-Lets. A proportion of the expenditure associated with these communal area assets is treated as an expense of the rental business.

However, a recent tax case won by HMRC has limited the scope of these allowances. Shared facilities like kitchens, bathrooms, and living rooms may not qualify for relief. Still, it’s possible to claim for items such as plumbing systems, electrical systems, lighting, and lifts in common areas like corridors, hallways, and basements.

For small-scale HMO conversions, a comprehensive capital allowances review may not be financially viable. However, a review could result in significant tax savings for larger-scale conversions and may be a worthwhile exercise.

One advantage of making a capital allowances claim is that if it results in a ‘rental loss’ on an HMO or multi-let property, this loss can be offset against non-property income, potentially resulting in a generous tax repayment. Alternatively, any ‘rental loss’ can be carried forward for offset against future rental profits.

Combining HMOs and Multi-Lets with Single-Let Properties

As a property rental business is treated as a single business for tax purposes, tax losses made in current and prior years can be used to reduce the tax bill on HMO rental profits. Suppose you’re a property investor who has accumulated significant buy-to-let losses. In that case, these can be utilised against the profits from an HMO or multi-let, effectively generating tax-free income.

Additional Costs of Running HMOs and Multi-Lets

Typically, an HMO landlord includes utilities, broadband, and council tax within the rent charged to their tenants. All these costs must be separately identified and reported within the investor tax return. However, these additional costs are fully tax-deductible if incurred ‘wholly and exclusively’ as part of the property rental business.

Tax Advice for HMO Investors

Understanding the tax treatment of HMOs and multi-lets is crucial for property investors looking to maximise their investment returns. By implementing the right tax strategies and keeping a detailed record of all expenditures, investors can benefit from tax reliefs and deductions, improving their overall profitability.

If you’re considering investing in HMOs and multi-lets, or if you already have an HMO or multi-let property portfolio, consult with a professional accountant to ensure you’re taking full advantage of all available tax benefits. Contact us today for tailored advice and support in optimising your HMO and multi-let tax strategies.