Q: Hi I bought my flat outright in July of this yeay and thinking of buying a house and keeping the flat. I will probably rent out the apartment for extra income. Can anyone tell me how I will stand as far as the tax, and pass on any tips that can help one another. I am in f / t job and a standard tax payer . Thanks a lot
Do void periods, bad debts, repairs, redecoration, legal fees,insurance, agents fees, costs of evicting bad tenants, rises in interest rates to, say, 8% and possible falls in property values figure in your business plan?
Are you familiar with the 50 Acts of Parliament and 70 sets of regulations which may apply?
Then you need to look at the taxation side. Any profit you make will be taxed at your highest rate of income tax and when you sell you will have to pay Capital Gains Tax., though there may be reliefs.
I decided I would be better off keeping the money in the bank. You need to decide whether or not to borrow the money. If you feel that property is still a good investment you may be better off buying a more expensive house to live in yourself. At least that would avoid the CGT problem.
I had a house worth ￡160K with 65K mortgage outstanding. I bought a new house for ￡265K with a mortgage for ￡222K. I spoke to HMRC and said that I wanted to count the interest on ￡120K of my NEW mortage as an expense for the rented property. (The mortgage on the rental property being ignored) This was perfectly acceptable because I was borrowing just to fund the business. This gave me expenses of ￡450 a month to off set against income. I get ￡625 rent, I pay the LA their fee and and then any other expenses and basically all the income is tax free until I owe less than ￡120K on my NEW house. (Did you follow that?)
On the CGT side (Capital gains tax) I bought the house for ￡90K and have owned it for exactly 6 years when I let it out. When I sell the house I need to work out the proportion of the gain that is attributable to the letting biz (I assume I'll sell it in 6 years time). My current understanding of CGT for let properties that you have occupied as your principle private residance at any time is that I work out the total number of months that I have owned the property for = 144 months. The price I will sell it for is ￡200K (well lets hope its more really) so 200-90 / 144 = the monthly gain. of this only 36 months gain is subget to CGT (I lived in it for 72 months and I get a further 36 months "allowance" – I don't remember the correct term) so the gain subject to cgt is 27500. But then their is another relief that I can use which means only the gain above 40K is subgect to CGT, and then their is the personal CGT allowance we all get of ￡8K ish.
Basically the property would have to increase to ￡280K ish before I will actaully have to pay any tax if I sell it at the 6 year point.
So to conclude – renting a property out is like printing your own money. Its easy! (I hope you note the sarcasm)
Just a quick word of caution – I am not a tax adviser, I am not offering you any advice and having tenants is a pain in the backside. Are you really cut out to be a landlord? Would you be better off selling your flat and not having a mortgage on your new house? Even though the figures look like I'll make lots of money, the extra mortgage I'm paying on my new house means I'm not and the hassell I've had from my tenants means I'll deserve every penny I eventually make (Oh, and I am seriously considering selling at the end of the tenants tenancy)
Good luck with what ever you decide.
guy
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My Rabbit boy turned out to be a girl – He's having difficulty adjusting.
Oh and expenses for the property can only be claimed for the period when the property is being let.
You can't offset a loss from residential property rental [apart from Furnished Holiday Lets] against your other taxable income.
This is only a loss if the OP is a paying an Interest only Mortgage.
If there is any capital repayment it is clearly income.
The fact that your rental income is £50 less than your mortgage is immaterial.
So your rental income, less mortagage interest only, less other direst expenses, leaves a taxable income.
BTW I'm not an accountant, but I run a business so understand what I need to understand.
You should consult an accountant if you are not sure.
You can't offset a loss from residential property rental [apart from Furnished Holiday Lets] against your other taxable income.
Are you talking making a profit above and beyond your mortgage payment or ANY money from your property?
I rent out a property and the rent is £50 LESS than what i pay on my mortgage per month, am i still liaible for tax on this?
You can offset the interest of your mortgage against the income but not the capital repayment. You can also offset any repair costs, maintainance costs and improvements costs against earnings.
If you are unsure get an accountant.