Renting out my house...

walter_plinge · 8 March 2006 at 8:23PM

Hi,
I will be renting out my house as soon as I have finished renovating it. I will be moving in with my partner at her house. I have had this intention for about six months now, and advertising it for rent will be very soon. I have suddenly come to the realisation that I have no idea about the tax implications of renting my house. Would it be possible for someone to help direct me to some good source information and/or answer some of the following questions. I apologise if this seems a bit basic, but I have never been self employed or filled out a tax return in my life!

1. Is the rent I receive taxable?
2. If it is, do I just fill in a tax return form at the end of the year and let them calculate it? (I have never had to fill out a tax return in my life!)
3. Is there a distinction (in terms of tax) between letting out a furnished or unfurnished property.
4. Do I class the rent return as income (may push me over the upper tax bracket - !!!!!!!)
5. Do I deduct my mortgage payments from rental income for tax calculation purposes?
6. Do I deduct repairs & maintenance from rental income for tax purposes?
(bloody hell .... the more I think about it the more complex it becomes!)
7. Is rental commision paid to letting agents tax deductable.

Thanks in advance,

wally.

sirjona · 8 March 2006 at 10:16PM

look into the rent a room scheme if you are a bit tax savvy not sure if completely legal but hey

pchelpman · 8 March 2006 at 10:23PM

At this stage in your learning process - and without geting too techinical at the moment - the answers to all your questions are "yes".

On 3 the main difference is that letting furnished propertry allows a special tax deduction for "wear & tear" on the internal furnishings, fabrics, utensils etc.

To get you going on learning up I suggest you read the Revenue's guides IR87 "Letting and your home" and IR150 "Property income and taxation". They set out most of the things you need to know. They used to be available on the Revenue's website but it looks as though they're not on the site at the moment. You should be able to get them from local tax offices but watch out.

Not everything in those books (or, indeed, anything the Revenue publish in public leaflets) is set in stone. If you have something that doesn't quite fit with their view of how things work ask here. On the whole, folk here are quite knowledgeable.

By the way the "rent a room" scheme is only for those letting out a room in the home in which they are currently living. For example, to a student lodger.

Ian_W · 9 March 2006 at 12:28AM

pchelpman is much more knowlegeable than me on tax matters but just for clarity, in respect of question 5, the interest is an allowable expense for tax but any repayment of capital isn't. So if you're on an IO mortgage it's all allowed, if it's a repayment then only the interest is.

walter_plinge · 9 March 2006 at 12:44AM

Thanks for all the answers. I have had a lodger for the past four years, the rent from which I have just ignored with regards to tax as it was under £85 per week (which I believe is the limit for the rent a room scheme).

If the interest part of the mortgage is tax deductable, could it be better for me to raise capital on the house via a remortgage (please note that really is a hypothetical question) so that the interest part of my mortgage is a much higher proportion of the rental income, and then stash the remortgage money somewhere paying an interest rate similar to that charged on my mortgage?

I will definitely get the inland revenue forms you mentioned pchelpman. Just for clarity, I have a repayment mortgage.

Do you pay the tax at the end of the tax year via the online tax assessment doo-dah? Is it really as easy as that guy on the telly says it is?

Your help is really appreciated!

Regards,

wally.

regularsaver1 · 9 March 2006 at 12:48AM

regarding the remortgage - have you consent from your lender to let the property or is it a buy to let mortgage

walter_plinge · 9 March 2006 at 10:26AM

regularsaver1 wrote:

regarding the remortgage - have you consent from your lender to let the property or is it a buy to let mortgage

Damn...Something else I have not considered. The mortgage is not buy to let, just a normal one. It is with the nationwide. At the risk of producing a never ending list of questions, how would I go about informing / asking the mortgage provider of my intention to let the property? Are they likely to insist that I change the mortgage to a buy to let one? Do many requests for consent to let turned down by mortgage providers? The mortgage is currently for about a third of the value of the house, and I have never been in arrears etc.

Ivrytwr3 · 9 March 2006 at 11:09AM

i have just let my house. My mortgage provider did not require i move to a buy to let mortgage, but i had to get a "consent to let" from them. This costs (admin fee of £125 for me for 3 years of letting). But each provider is different. You must inform them or you are in contrevention of your mortgage agreement and you run the risk of your insurances been invalidated.

Did you ever get the question about when yuo fill in the Self Assessment tax form answered? ie begining or end of year? Do you do it a year after you let the house or at the end of the tax year? Something i need to look into!

Ian_W · 9 March 2006 at 11:14AM

Hi Walter,
1. Ask NW, some lenders will charge an admin fee, others high % int rate, others won't consent and you'll need to remort to a BTL. The lender has less security with a tenant in place so if you don't tell them they could get very cross!
2. Speak to your insurer, same applies particularly if you let furnished.
3. There is a misconception that if you remortgage your BTL all the interest is allowable no matter what the purpose of the loan and, judging from these threads, a lot of people do it that way and use the money perhaps to pay something off their residential mortgage. It's the purpose of the loan that makes the interest on it tax deductable, not the property it's secured against. So you can borrow against your main residence to purchase a BTL and claim the interest but borrow against a BTL for a non-business purpose and I don't think the IR will be too pleased if you claim the interest as tax deductable.
4. You may be as well getting an accountant to do your 1st year return and explain what you can claim to you - it's then simpler to do your own in future years. For example, if you do let furnished you can either claim the actual cost of replacement furnishings [not the originals] as they arise, or claim a 10% wear & tear allowance based on letting income.
Pchelpman's pointed you to the IR guide, it's all in there and fairly easy to understand. It's also one of the best cures for insomnia I've come across!! BoL.
EDIT: You fill in your tax form after the end of the tax year [up to Jan 07 in this instance] and there are I think extra pages for income from property, not sure if they're available online.

pchelpman · 9 March 2006 at 11:19AM

OK, Wally. Let's go thought this a bit at a time.

Ian_W wrote:

…the interest is an allowable expense for tax but any repayment of capital isn't. So if you're on an IO mortgage it's all allowed, if it's a repayment then only the interest is.

Agreed fully. In my haste to try and “keep things simple” I missed that one. Should have picked up on it. Thanks Ian.

walter_plinge wrote:

Thanks for all the answers. I have had a lodger for the past four years, the rent from which I have just ignored with regards to tax as it was under £85 per week (which I believe is the limit for the rent a room scheme).

More or less right, Wally, but the figure does change from time to time.

walter_plinge wrote:

If the interest part of the mortgage is tax deductible, could it be better for me to raise capital on the house via a remortgage (please note that really is a hypothetical question) so that the interest part of my mortgage is a much higher proportion of the rental income, and then stash the remortgage money somewhere paying an interest rate similar to that charged on my mortgage?

Must be careful here. Many people fall into a trap.

It’s not the security for the loan that’s important. Whether or not interest is tax deductible depends on WHAT YOU DO WITH THE MONEY YOU BORROW. To get tax relief you must use the money for a “tax qualifying purpose”. So … for tax purposes no-one cares how you raise the funds so long as you use the money to buy the let property, repair it, redecorate and so on.

If you raise money on the property to be let BUT use the money to buy a new house for you to live in then … no tax deductions.

walter_plinge wrote:

...Do you pay the tax at the end of the tax year via the online tax assessment doo-dah? Is it really as easy as that guy on the telly says it is?

When the letting starts you must tell the taxman. There are time limits to be observed and, guess what … if you fail to meet them you get fined (surprise).

I would recommend you notify them in writing AND request a written reply/acknowledgement to your letter. Deliver it by hand or send it recorded delivery.

At the first 5th April after your letting starts the Revenue should send you a Tax Return to complete but ALWAYS REMEMBER it is up to you to file voluntarily of you don’t get one. You can’t go blaming the Revenue except in some very special and narrowly defined circumstances. Like I said before I don’t want to get complicated at this stage.

As to filing online, well, I’m sure we all have our own views on that depending on experience.

You can try it if you like but my advice for someone in your position is to do it in paper form first so you get the hang of it.

Strongly recommend the IR150. It’s a great little guide and easy to read. Covers just about everything.

walter_plinge wrote:

...how would I go about informing / asking the mortgage provider of my intention to let the property? Are they likely to insist that I change the mortgage to a buy to let one? Do many requests for consent to let turned down by mortgage providers? The mortgage is currently for about a third of the value of the house, and I have never been in arrears etc.

Advise you talk to a specialist first before you tell anybody anything. Maybe a good reliable mortgage broker. If you can get your terms & conditions for your mortgage read them and see what they say about this issue.

Lastly please don't try and do everything yourself with ad-hoc advice from folk here. You should go see a tax specialist preferably someone qualifed with either/both the CIOT and/or ATT. They will be able to help you.

Links .....

CIOT > http://www.tax.org.uk/

ATT > http://www.att.org.uk/

All the best.

EDIT > Yo...Ian....you type faster than me!!

WHA · 9 March 2006 at 11:35AM

I'm afraid that I disagree with the responses above re the re-mortgage.

Some tax inspectors and even some accountants (who should know better) have argued that the interest is not allowable if the remortgage proceeds are not used to buy or improve the rented property or to replace an existing loan that was so used. That view seems to be a hangover from pre-1995/96 days when the application of the mortgage proceeds to those specified purposes was a condition of allowability. It does not fully recognise the consequences of the 1995/96 changes that provide Sch A rental income is now to be computed on Sch D I trading income principles, which clearly allow deductions for refinancing costs.

Basically as long as the borrowing doesn't exceed the capital in the property at the day the rental business starts, then the loan interest is fully allowable. The actual calculations and rationale are quite complicated as you need to be able to prepare balance sheets to support your claim.

Have a look at example 2 in the Inland Revenue's manual BIM45700. From that it would appear that indeed you could re-mortgage your current property which is soon to be your "Buy to let" and claim all the mortgage interst as an expense regardless of to what use you actually put the amounts raised!

http://www.hmrc.gov.uk/manuals/bimmanual/BIM45700.htm

Renting out my house...

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