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Minamoo

Tax on rental property

Hello!

I was hoping one of you lovely people could give me a bit of advice. DH and I have been trying to sell our flat in bristol since May last year with no success. So we've now decided to just rent it. Because our mortgage payments on the flat are rather high ( about £550) and th emost we can make in rent is £550, we decided to apply for a new mortgage. Given that we want to let the flat out, the best rates we could get were still higher than we were hoping for. So we decided to take out a larger mortgage on our leeds house and use that money to pay off the mortgage on the bristol flat. If this goes through, we will use the rental money to pay the mortgage on our residential property. Only problem with this is now in terms of tax. We get taxed on our net profit from the rental. But given that there will officially be no mortgage on that flat, will they count all the rent as profits? and if so, will we be taxed on the whole lot? And do you have any idea how this would work out in terms of the amount of tax we pay overall? DH is the sole earner in our household and the flat is in his name so I assume that the "profit" would all be added to his salary and deducted from that?

Help please!
Bebo

Taxed as income over and above what he already earns. So depending on his current earnings it'll be 20% or 40%. You can claim offset any expenses you incur in letting it against the tax, including an allowance for wear and tear. Als be aware that when you sell it you may also be liable for capital gains tax on any increase in value if you have not been living in it.
Went

Some of your income can be off-set against expenses of course - such as gas certs and refurbishment or upkeep.
Minamoo

Also be aware that when you sell it you may also be liable for capital gains tax on any increase in value if you have not been living in it.


Rofl! If only we could make a profit. We paid £122,500 for it then spent £7000 on refurbishing it and putting in a gas central heating system. It's now on the market for £103k. Even two years from now it is unlikely that we will make our money back. We would be lucky to break even.

So....do we need to find an accountant then? Rolling Eyes
Bebo

So....do we need to find an accountant then? Rolling Eyes


I would recommend it. His fees are tax deductable though.
Minamoo

Some of your income can be off-set against expenses of course - such as gas certs and refurbishment or upkeep.

So if we had a buy to let mortgage, would we be able to count that mortgage as part of our expenses? and therefore our 'profits' would be lower? Our expenses are about £50 a month. Gas cert and pat testing is about £200. Then there's landlords insurance which I think is going to be about £20 a month. Then there's water rates. So at least £50. We still haven't been approved for this mortgage and it's still not too late to go down the buy to let route. But I wonder how much difference it would actually make.... We'd be paying about £100 more per month extra on a BTL mortgage.
Bebo

http://www.buytoletmortgages.co.uk/php/buytolet_mortgages_page6.php

According to that you can offset the interest. I've been advised otherwise in the past, but that may have changed. I suggest you get professional advice from a tax consultant / accountant before deciding the best approach.
earthyvirgo

Some of your income can be off-set against expenses of course - such as gas certs and refurbishment or upkeep.

So if we had a buy to let mortgage, would we be able to count that mortgage as part of our expenses? and therefore our 'profits' would be lower? Our expenses are about £50 a month. Gas cert and pat testing is about £200. Then there's landlords insurance which I think is going to be about £20 a month. Then there's water rates. So at least £50. We still haven't been approved for this mortgage and it's still not too late to go down the buy to let route. But I wonder how much difference it would actually make.... We'd be paying about £100 more per month extra on a BTL mortgage.

I think that buy to let mortages are currently asking for a huge deposit, circa 40%.

EV
earthyvirgo

Have a look at this too Mina
http://www.depositprotection.com/Public/About.aspx

By law, you need to put your tenants deposit in a special account.
The above offers this free and is government approved.

EV
Minamoo

I think that buy to let mortages are currently asking for a huge deposit, circa 40%.

EV

We already own the flat. We had two options. we could either remortgage our flat and get a buy to let mortgage, in which case the amount of interest each month would have been roughly £420. Or we could take out a mortgage against our leeds house which would be a residential mortgage with lower rates. and our payment would be about ££320. Then we would use this residential mortgage to pay off our flat's mortgage and reduce our monthly outgoings from £550 to £320 pm. As it would be taken against our leeds house which is worth more than our bristol flat, the loan to value ratio is about 65%. Then the bristol flat would be loan free. But I hadn't thought about the whole tax thing. Sad
Minamoo

Have a look at this too Mina
http://www.depositprotection.com/Public/About.aspx

By law, you need to put your tenants deposit in a special account.
The above offers this free and is government approved.

EV

Thanks for that. I registered with them. As soon as I get the deposit I will put it in. Smile
yummersetter

I expect you know that you should get a solicitor to draw up your tenancy agreement, but thought I should mention it. Another tax-deductible expense. Minamoo

I expect you know that you should get a solicitor to draw up your tenancy agreement, but thought I should mention it. Another tax-deductible expense.

Do I have to get a solicitor? I was just going to copy my last tenancy agreement and make changes as appropriate to reflect our rent etc.
yummersetter

Can of worms.

We've had good tenants who've never caused any trouble and bad ones who spend all their time finding things for you to pay for whilst avoiding paying any rent. The good ones make it seem like an easy, troublefree process, the bad ones keep you awake at night with worry. Especially if you've taken on additional expenses to be met by their rental payments.

I'd seriously advise getting a solicitor to draw it up, certainly for the first tenancy. There may be clauses they'll suggest which may not be included in the one you'd copy.
Minamoo

I've found a very very comprehensive tenancy agreement on the website of the Northern Ireland Housing Executive which is very comprehensive and covers things I'd not even thought of so I'm just going to use that.

I don't think this person is going to be a difficult tenant. She's in her 50s, a full time mental health nurse at a medium security facility who amazingly enough likes her job, and is the kind of tenant who wants to plant flowers in the garden and paint the flat. So someone who will invest the time and money to keep the flat looking good until we come to selling it in a few years' time and highly unlikely to make a nuisance of herself and trash the place.
welsh veg grower

OH works in housing and we have tenants - he just used a £9.99 WH Smiths tenancy agreement. Says its as good as any.

He always takes up references, puts bond in that scheme EV gave you and keeps an eye.

As far as tax deductable if the mortgage is for the flat you are renting out the interest only part is tax deductable if my memory serves me right. You dont need an accountant but you will need to do a tax return at the end of the year. Another point if you both earn it you can alwasy share the profit (if you ever make it ) 50/50 so it shares out the liability and also if one of you isnt paying tax (non or low eaner) or if one is on higher tax at least only aprt is charged at the higher 40% tax and half at 20%

Hope that helps a bit
john of wessex

I was in a similar situation to you.

Firstly if the mortgage repayments are about equal to the rent there wont be much of a tax liability: it may be worth paying some of the flat mortgage off but that's down to you.

The interest is allowable against tax & the return is pretty simple - do PM me if you want.

The mortgage on my other house is a standard domestic one, I just got permission from the lenders to let the property out.

I used an agent to let the house, mine is good but beware there is some real pond life out there.

I simply record income & expenditure on a spreadsheet & pop the igures into the tax return at the end of the year.

D make sure though when you start letting you inform HMRC
RichardW

If you dont earn why not put all of the payments down as yours to use up all your tax free allowance? Oh & if you do do it as a split you dont have to split it 50-50. stumbling goat

Can I just check that I understand your question correctly?

You are saying that you will rent out your flat but increase the mortgage on your residential property and try to offset the income from the flat against the costs on your residential property?

A loan or mortgage taken out on one property can still be used to offset income profit on another if that loan is used to purchase that other property. It is what the money is used for that matters. But, if you already own the property, I am not sure this would apply? You are not using the money to buy a BTL property, you already own it. You would just be rearranging your finances.

However, if you restructure your finances in such a way that the mortgage on the flat is as high as you can make it and the mortgage on your residential property is as low as you can make it then you will get maximum benefit against any profit from the rental income.

Before you rent out have you considered, could you stand to be without income for a few months if the property does not rent, or if any tenants do not pay?

Can you afford to maintain the property if the tenants damage anything, even if they are not paying rent, to ensure you comply with your obligations under s11 LL & T Act 1985?

If you can answer yes to any awkward questions like these, then renting may be for you.

atb

sg
Minamoo

If you dont earn why not put all of the payments down as yours to use up all your tax free allowance? Oh & if you do do it as a split you dont have to split it 50-50.

I don't earn but the flat is in hubby's name not mine. I can change the tenancy agreement so I'm the only one on it but would that be enough?

We can change our current mortgage so we can rent the property out, but as I said, the payments and costs would be at least £50 more than what I'd make on rent. It seems silly to lose money every month. Hence the new mortgage on Leeds house to pay off mortgage on Bristol flat.
RichardW

Your married so it belongs to both of you.

You could do it as a partnership. Then split the income how ever you like.
john of wessex

Unless you can borrow much more cheaply on the new house you will be paying about the same amount in interest.

However the interest you pay on the Bristol flat can be offset against tax, so in effect for every % you are charged the cost to you is 0.8%, however the interest on the Leeds house has tp be paid from taxed income.

The more you mortgage the bristol flat the better.

It sounds like you need to talk to an accountant as a matter of urgency and certainly before you make any arrangements
welsh veg grower

If you dont earn why not put all of the payments down as yours to use up all your tax free allowance? Oh & if you do do it as a split you dont have to split it 50-50.

But if you jointly own it it is 50/50 !

ok now seen OH owns it mm, be careful then as I would say its his income not yours.
Nick

One way of lookoing at it is, if you have a mortgage on a property and it all goes wrong, you may lose the property. Would you prefer to risk losing your home, or a 'spare' flat?

The cost of borrowing is tax deductable, so this includes fees, interest, solicitors and surveyors.

I don't think you can claim wear and tear unless its furnished. And, as some one else says, the compulsory tax return is very simple. You'll need your P60/45, P11D and the incomings and outgoings for the flat.

You could hire an accountant, or get something like the dummys guide to renting. Its not rocket surgery.
RichardW



But if you jointly own it it is 50/50 !

ok now seen OH owns it mm, be careful then as I would say its his income not yours.

But what if she does all the work? Silent partners get less than working partners. Partners that negotiate a bad deal get less. Life is not fair. Honestly you dont have to split it 50/50.

Th OH could employ you to look after the rental. But that might cost more than a good split.

But as has been said get professional advice.


Oh just thought, dint they bring back in the ability to use up the unused part of your partners allowance?
stumbling goat

The "fair wear and tear" allowance can be claimed for carpets and curtains, if provided.

OP and OH should consider seeking professional advice before making any changes to their situation as to make the wrong and possibly irreversable change might be costly.

sg
Nick

The "fair wear and tear" allowance can be claimed for carpets and curtains, if provided.
sg

Not if not fully furnished.

Quote:
If the accommodation isnít furnished, or only partly furnished, the 10% wear and tear allowance isnít due.


http://www.hmrc.gov.uk/manuals/pimmanual/pim3200.htm
stumbling goat

apologies for my error in the opinion expressed regarding the wear and tear allowance. I stand corrected.

sg
Minamoo

Sigh. I thought this would all be so easy. I need to get through to the mortgage brokers and get them to investigate buy to let mortgages I think.

This flat was the worst purchase we have ever made. never ever ever buy a leasehold flat. Nobody wants to buy them. Sad It will take up all your savings and haunt you for years.
Shetlander

I would speak to a good tax accountant - in 30 minutes they should be able to tell you how to structure it so as to maximise the return.

I don't know if you can offset the interest on a loan used to buy a property if it is used to buy a different property. If this was a business then there would be no problem - e.g. small businesses have loans secured on the owners' assets. But property is treated differently from employed or self-employed income.

An accountant will be able to tell you what's best e.g. if the rent exceeds the interest cost it your husband could rent the flat to you and you could then sublet, making a small profit (to justify the effort you put in managing the activity). If you have no other income this would be swallowed up by your personal allowance and so reduce the tax on the "profit".

A good tax accountant will be able to optimise the structure for you.
Nick

Sigh. I thought this would all be so easy. I need to get through to the mortgage brokers and get them to investigate buy to let mortgages I think.

This flat was the worst purchase we have ever made. never ever ever buy a leasehold flat. Nobody wants to buy them. Sad It will take up all your savings and haunt you for years.


It isn't that hard, really. Smile

And the flat will shift, it's not the leasehold that's the problem, it's the economy as a whole.

Go, see a tax accountant, and he'll show the best way forward. I wonder if any of the lenders provide this service, and if not, why not? It would be worth the extra 0.25%, or whatever they'd charge.
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