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  • FIRST POST
    • chelseablue
    • By chelseablue 17th Jul 17, 12:03 PM
    • 2,129Posts
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    chelseablue
    Tax implications for renting out house
    • #1
    • 17th Jul 17, 12:03 PM
    Tax implications for renting out house 17th Jul 17 at 12:03 PM
    Will try to give as much detail as I can.

    My mother in law who is 66 owns a 3 bedroom house in Berkshire.
    Mortgage was paid off about 4 years ago.

    Her brother lives a few roads away also in a 3 bed house that is mortgage free.

    The brother is selling his house and buying a 2 bedroom bungalow in a different area of the country.

    He has asked my mother in law if she would like to move into his bungalow with him, while still keeping her house but renting it out.

    Her house would rent for about £1,200 a month.

    Obviously done through an EA she would pay a fee to them.

    I presume she would also pay income tax on the amount she earns? Is that at the same rate as employed people pay?

    Are there any other taxes to pay? I don't think capital gains applies but could be totally wrong!

    She knows that she would need landlord insurance also
    Mortgage starting balance 26.02.16 £231,294
    Mortgage after Year 1 £225,078
Page 1
    • cte1111
    • By cte1111 17th Jul 17, 12:11 PM
    • 7,121 Posts
    • 373,305 Thanks
    cte1111
    • #2
    • 17th Jul 17, 12:11 PM
    • #2
    • 17th Jul 17, 12:11 PM
    Property income is taxed at the same rate as on employed income, although there will be no NI to pay (as this is a house she owns personally and she does not seem to be running a property business). Costs related to letting the property, e.g. letting agents fees, insurance, cost of gas safety check, can be deducted from the income.

    https://www.gov.uk/renting-out-a-property/paying-tax

    When the house is eventually sold, there is likely to be a capital gain. This will be the difference between the price she bought and sold it for. There will be a Principal Residence Relief applying to the period in which the house was her main home, plus Lettings Relief. This may mean that the payable CGT, after her annual allowance, is nil, but this is dependent upon house prices, so hard to tell!
    • chelseablue
    • By chelseablue 17th Jul 17, 12:14 PM
    • 2,129 Posts
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    chelseablue
    • #3
    • 17th Jul 17, 12:14 PM
    • #3
    • 17th Jul 17, 12:14 PM
    Property income is taxed at the same rate as on employed income, although there will be no NI to pay (as this is a house she owns personally and she does not seem to be running a property business). Costs related to letting the property, e.g. letting agents fees, insurance, cost of gas safety check, can be deducted from the income.

    https://www.gov.uk/renting-out-a-property/paying-tax

    When the house is eventually sold, there is likely to be a capital gain. This will be the difference between the price she bought and sold it for. There will be a Principal Residence Relief applying to the period in which the house was her main home, plus Lettings Relief. This may mean that the payable CGT, after her annual allowance, is nil, but this is dependent upon house prices, so hard to tell!
    Originally posted by cte1111
    Thank you. Her and her husband paid £77,000 for the house in 1988, its now worth around £320,000.


    If she didn't rent it out at all and just stayed living in it, is there capital gains tax to pay when the house is sold and the money goes to her sons?
    Sorry I've never had to look into this stuff before
    Mortgage starting balance 26.02.16 £231,294
    Mortgage after Year 1 £225,078
    • saajan_12
    • By saajan_12 17th Jul 17, 12:21 PM
    • 642 Posts
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    saajan_12
    • #4
    • 17th Jul 17, 12:21 PM
    • #4
    • 17th Jul 17, 12:21 PM
    Yes, she would pay income tax on the rent income minus repair / maintenance costs, agent fees, etc.

    If/when the house was sold, she would pay CGT for the period it was not her main residence, minus the last 18months. e.g. if she owned it for 15 years, living there for the first 10 year and letting for the last 5years, then she would be liable for 3.5 years (5-1.5) out of the 15 years ownership. So she would pay tax on the increase in house price x 3.5 / 15 - 11.3k allowance. This would be taxed at 18 or 28% depending on her income tax banding. Note this is a rough idea, it woudl actually be calculated more accurately in months not years and there would be other buying/selling costs, capital improvement costs to take into account.
    • G_M
    • By G_M 17th Jul 17, 12:25 PM
    • 40,504 Posts
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    G_M
    • #5
    • 17th Jul 17, 12:25 PM
    • #5
    • 17th Jul 17, 12:25 PM
    Read

    * New landlords: advice, information & links

    * Letting agents: how should a landlord select or sack?
    • Jenniefour
    • By Jenniefour 17th Jul 17, 12:35 PM
    • 1,066 Posts
    • 1,022 Thanks
    Jenniefour
    • #6
    • 17th Jul 17, 12:35 PM
    • #6
    • 17th Jul 17, 12:35 PM

    If she didn't rent it out at all and just stayed living in it, is there capital gains tax to pay when the house is sold and the money goes to her sons?
    Originally posted by chelseablue
    No, would not be liable for capital gains tax.
    • 00ec25
    • By 00ec25 17th Jul 17, 12:39 PM
    • 4,529 Posts
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    00ec25
    • #7
    • 17th Jul 17, 12:39 PM
    • #7
    • 17th Jul 17, 12:39 PM
    If/when the house was sold, she would pay CGT for the period it was not her main residence, minus the last 18months. e.g. if she owned it for 15 years, living there for the first 10 year and letting for the last 5years, then she would be liable for 3.5 years (5-1.5) out of the 15 years ownership. So she would pay tax on the increase in house price x 3.5 / 15 - 11.3k allowance. This would be taxed at 18 or 28% depending on her income tax banding. Note this is a rough idea, it woudl actually be calculated more accurately in months not years and there would be other buying/selling costs, capital improvement costs to take into account.
    Originally posted by saajan_12
    the house was previously her main/only residence and therefore her CGT calculation would also include Letting Relief against the period when it was not her main residence

    OP read GM's links. Your question has been asked countless times and GM's links cover all (?) you will need to know about becoming a landlord, selecting and using agents a

    as for income tax, GM's links provide info but if you want to jump straight to a relatively dumbed down and very basic intro to what you need to know then read the .Gov website
    https://www.gov.uk/renting-out-a-property/paying-tax

    The CGT when eventually it is sold should not be a deciding factor in whether to let the property. CGT is a tax on the gain, you only pay it on the amount by which the value has increased so do not let the tax tail wag the dog when deciding what to do
    Last edited by 00ec25; 17-07-2017 at 12:41 PM.
    • cjdavies
    • By cjdavies 17th Jul 17, 1:57 PM
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    cjdavies
    • #8
    • 17th Jul 17, 1:57 PM
    • #8
    • 17th Jul 17, 1:57 PM
    I would also advice to read about what it entails being a landlord, it's not receiving money, see G_M's links.
    • chelseablue
    • By chelseablue 17th Jul 17, 3:39 PM
    • 2,129 Posts
    • 2,596 Thanks
    chelseablue
    • #9
    • 17th Jul 17, 3:39 PM
    • #9
    • 17th Jul 17, 3:39 PM
    I would also advice to read about what it entails being a landlord, it's not receiving money, see G_M's links.
    Originally posted by cjdavies
    Seems like a lot of stress to me, I wouldn't want to do it. Especially if I was nearing 70
    Mortgage starting balance 26.02.16 £231,294
    Mortgage after Year 1 £225,078
    • 00ec25
    • By 00ec25 17th Jul 17, 3:55 PM
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    00ec25
    Seems like a lot of stress to me, I wouldn't want to do it. Especially if I was nearing 70
    Originally posted by chelseablue
    depends if the MIL needs a pension/income top up or not? How about this way of looking at it: 66year old female, therefore reasonable expectation of 20+ years until death
    • if let out £14,400 gross, less agent fee (10%), tax (20%) and £300 for other costs leaves £10,000 per year profit. Patently that is £200,000 until death
    • contrast that with selling a 3 bed "Berkshire" property for £x (I'd assume its more than 200k?) and spending the lump sum over the next 20 years
    obvious unknowns are:
    a) if let the income would increase as the rent was reviewed every X years so over time it would be more than 200k in total

    b) if let she can always sell it if really needs to later down the line, eg: to fund care home costs. If sold now the deprivation of capital may be an issue depending on what she does with the money

    c) if sold, will the brother expect her to buy into the shared property since she would obviously have a lump sum with which to do so. Your OP does not explain what, if anything, brother gets for encouraging/"allowing" his sister to share with him but let her own place - does he want a share of the rent? does he expect her to pay towards the shared place?

    as others have said, no right or wrong answer as each has their issues
    • chelseablue
    • By chelseablue 17th Jul 17, 4:07 PM
    • 2,129 Posts
    • 2,596 Thanks
    chelseablue
    depends if the MIL needs a pension/income top up or not? How about this way of looking at it: 66year old female, therefore reasonable expectation of 20+ years until death She has had cancer twice, hope this doesn't sound like I'm writing her off but would be amazed if she was here in 20 years
    • if let out £14,400 gross, less agent fee (10%), tax (20%) and £300 for other costs leaves £10,000 per year profit. Patently that is £200,000 until death
    • contrast that with selling a 3 bed "Berkshire" property for £x (I'd assume its more than 200k?) and spending the lump sum over the next 20 years Its worth approx. £320,000
    obvious unknowns are:
    a) if let the income would increase as the rent was reviewed every X years so over time it would be more than 200k in total

    b) if let she can always sell it if really needs to later down the line, eg: to fund care home costs. If sold now the deprivation of capital may be an issue depending on what she does with the money

    c) if sold, will the brother expect her to buy into the shared property No he wants to own it himself since she would obviously have a lump sum with which to do so. Your OP does not explain what, if anything, brother gets for encouraging/"allowing" his sister to share with him but let her own place - does he want a share of the rent? does he expect her to pay towards the shared place? The gist I get is she would pay money towards bills and food.

    as others have said, no right or wrong answer as each has their issues
    Originally posted by 00ec25
    Answers in bold
    Mortgage starting balance 26.02.16 £231,294
    Mortgage after Year 1 £225,078
    • 00ec25
    • By 00ec25 17th Jul 17, 4:14 PM
    • 4,529 Posts
    • 3,912 Thanks
    00ec25
    Answers in bold
    Originally posted by chelseablue
    ok, I'd agree with you in that case. Brother is admirably going to look after his sister in what is likely to soon be declining health. Yes he gets to halve his bills, but at the "cost" of almost certainly having to physically care for her "soon"

    she gets to bank a significant lump sum tax free and can spend it wisely as she sees fit (subject to deprivation of capital remaining an issue of course)
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