Tax on rental income

[rfisher]

Can't remember the details but if you buy another house and rent your current house out do you pay tax only on the income above the mortgage payment on the 1st house?

So, if the mortgage payment on the rented house was £500 pcm on a repayment mortgage where £300 was interest and £200 capital and the rental income was £1000 pcm would you pay tax on £700?

If the rental house mortgage was an interest only mortgage at £300 pcm you would pay tax on the £700 - yes?

If this is all correct, can you avoid this by having the £700 paid directly into an ISA or other 'tax envelope'?

Thanks.

[Lambo FirstBlood]

Any 'income' or 'profit' from this venture is taxable.

If you rent the house out for £1000.00 per month and the interest part of the mortgage is £300.00 per month, then you have £700.00 per month of income which will be taxed at the highest rate that you are currently paying. If all or part of this income takes you over the 40% bracket then you will pay 40% tax on it.

Note that the repayment part of your monthly payment is not deductable and can't be counted as an expense as it has benefits to you

It's worth noting though, that any expenses can be offset. With the scenario that you give, you have £12,000 of annual income from this property which will be on your tax return. You currently pay £3600.00 in interest charges which will be deducted before tax is calculated. If you pay for buildings insurance or for a boiler repair etc, all of this will also be deducted before your tax calculation is made.

Regarding ISA's: Basically an ISA is a savings account only any interest earnt on the money deposited is exempt from income tax. The money you put in to the ISA is not exempt and therefore you will have to pay tax on it.

There are ways of holding the property offshore but for the amounts here, it would cost more to set up than any benefit you might get. I'm afraid you will have to pay some tax.

It's also worth noting that when you sell the property, you will be liable for capital gains tax on any profit you make. You will get some relief from this as it was your primary residence for a time.

Hope this helps mate.

If you need more professional advice, I have an excellent accountant I can recomend.

PM me if you are interested.

[Wings]

“It's worth noting though, that any expenses can be offset. With the scenario that you give, you have £12,000 of annual income from this property which will be on your tax return. You currently pay £3600.00 in interest charges which will be deducted before tax is calculated. If you pay for buildings insurance or for a boiler repair etc, all of this will also be deducted before your tax calculation is made.”

Excellent advice, and one should also not forget a landlord has the option of either deducting the costs of furniture and fittings, or as most landlords who rent out unfurnish properties do, and that is to deduct from the net profit, a 10% allowance of the total rental income for wear & tear, so from your example £12,000 rental income, £1,200 would be added to the mortgage interest, building insurance, boiler repairs etc. etc, and deducted from the total rental income.

Also worth noting that should the OP have a partner, consider using your partner’s tax allowance to reduce your own personal tax below the 40% tax rate.

[rfisher]

Thanks - very comprehensive reply.

[Eric Mc]

Are you married?

Is the property jointly owned?

Are you aware of the Capital Gains rules on second (amd third, fourth etc) properties?

[rfisher]

Eric Mc said:

Are you married?

Is the property jointly owned?

Are you aware of the Capital Gains rules on second (amd third, fourth etc) properties?

Nope.

Yep.

Nope.

How does the CG stuff work?
Is it affected by how long we have lived in the house before renting it?
Is there a time limit (say we sell it in 10 years time)?
Is there an idiots guide to the rules somewhere?

Thanks.

[Eric Mc]

rfisher said:

Eric Mc said:

Are you married?

Is the property jointly owned?

Are you aware of the Capital Gains rules on second (amd third, fourth etc) properties?

Nope.

Yep.

Nope.

How does the CG stuff work?
Is it affected by how long we have lived in the house before renting it?
Is there a time limit (say we sell it in 10 years time)?
Is there an idiots guide to the rules somewhere?

Thanks.

Being married offers some advantages regarding transfer of properties or shares of property between spouses i.e. such transfers are completely exempt from IHT. This is probably not an issue at the moment but could be an issue if one of you died.

As the property is jointly owned, the rental income is assesable on both of the owners - split 50:50 of course. It does mean both of you will probably need to complete a Self Assessment tax return.

Since 6 April 2008, length of ownership has no effect on the Capital Gains calculation. Capital Gains Tax is calculated on the difference between the original buying price of the property and the eventual sales price of the property when it is finally disposed of. All the buying and selling costs (legal fees, stamp duty etc) are allowed to be deducted from the proceeds when working out the "Gain on Disposal".
"Enhancement" expenditure on the property can also be deducted from the sale price. This is usually Capital Expenditure incurred on the property over its useful life. More regular "Revenue" expenditure (Repairs, Maintenance etc)will more likely have already been claimed as regular deductions against the annual Rental Income.
In addition to this, the owner(s) is/are allowed to offset against their share of the gain their personal Annual Capital Gans Tax Allowance - which currently stands at £10,100 per individual. Being jointly owned, any gain on your property would not be taxed if it was less than £20,200 (£10,100 x 2).

Finally, Capital Gains Tax is charged at a fixed 18% on the taxable Capital Gain.

Edited by Eric Mc on Friday 24th July 07:19