Tax on income from renting a property

Idonex

Hi,

Looks like i'm (well my girlfriend is) going to have to rent out our existing flat, and I have a few questions about tax on income from renting a
property. Might be stupid questions, but our only tax dealings right now are done automatically by PAYE! If i earn 35,000 a year in
my normal job and have an interest only mortgage of 695 a month. I plan to rent out the property for 840 a month. This would give
a total rental income for the year of 10,080, with a profit of 1740.

1) What do i declare to the tax office, the whole amount of 10,080 or the profit of 1740?

2) If it's the whole amount of 10,080, will i pay tax on this entire amount, even though it's not all profit?

3) What tax rate will i pay? Do the tax office add the 10,080 to my existing 35,000 salary? If so this would mean part of the rental
income would be taxed at 20% and the rest over 42k at 40%?, which would mean a tax bill of over 2,000? If i earnt more in my job, say 45,000 and i added the 10,080 to that would the whole rental income be taxed at 40%? Meaning a tax bill of around 4000 a year???

Apologies if this is in the wrong forum, didn't know whether it was suited to this renting forum or the tax forum.

Thanks!

ncooper1974

You only pay tax on the profit.
You say you have an interest only mortgage, but surely you have other expenses such as agent fees, insurance, EPC, corgi (if its gas) etc....you could find out that you're actually making a loss!

CLAPTON

you are taxed on the profit i.e. gross rent less allowable expenses
well worth researching allowable expenses (include interest on mortgage, advertising expenses, if furnished you can deduct 10% of the rent for wear and tear, costs of certification of gas and electric appliances

the profit is 'added' to your salary and taxed accordingly

if the property is jointly owned then you divide the profit equally between your

40% tax starts at £43,875 (after deduction of any occupational pension payments)

theartfullodger

Welcome to the fun world of property letting!

You need this...
http://www.hmrc.gov.uk/manuals/PIMMANUAL/Index.htm

At the end of the tax year request a paper tax return/do it online. There are (I think) 2 pages in the Property income optional section - not too painful.. so bung your actual numbers in there & tax man will ask you for more money then or send you a cheque..

But you'll nae make a profit... There are other expenses...
- Interest may go up when you ask your lender if he allows you to let (if you ain't already)
- Landlord insurance
- Corgi cert if gas
-EPC
- Fees for LL association (NLA or RLA)
- etc etc etc etc...
- Maintenance bills (oh yes, there will be)
- legal charges (tenancy agreement??) Might be worth getting someone experienced (? a solicitor who understands the business) to do things initially so things are done right - references, deposit in govt. scheme, notices!!

Cheers!

Lodger

Hope you have a thick skin!

Idonex

Thanks, yeah i have put some initial deductions (service charge, letting fees, insurance etc) which would bring the income down to about 7,000. We won't be making a profit, in fact we'll be subsidising renting it out, but the only other option is sell and we'll lose money on that too, but that's another story..

We have a solicitor to help us and the bank has given a consent to let.

About what you pay tax on again - excuse me if i'm being dense, but we will pay tax on that whole amount? In this case the 10,000 odd (840 rent a month * 12) minus the allowable deductions? If that's the case we will probably just sell it and cut our losses, as a tax bill of thousands a year isn't doable.

The tax office site says:
"Whether you let one or several properties, you're taxed on the overall 'net profit'. You work this out by:
adding together all your rental income
adding together all your allowable expenses
taking the allowable expenses away from the income "

Which would give out the 7000 odd figure above, which will probably decrease with more allowances taken off, but not buy a great deal i would imagine.

Thanks

silvercar

You pay tax on the profit, that is after deducting the expenses like the mortgage interest. In your case you will make a loss. As this is a loss from rentals you can't put it against your earned income to reduce your tax bill. Instead you carry the loss amount forward to next year. When you make a profit (assuming in some future years rental has increased) then that profit is reduced by the carried forward losses and so reduces you tax bill in that future year.

Trollfever

Don't forget that your girlfriend will be running a business:

http://www.businesslink.gov.uk/bdotg/action/home?domain=www.businesslink.gov.uk&target=http://www.businesslink.gov.uk/

Idonex

Ah i see. I didn't realise you could claim the mortgage interest as a deduction even if you're on an interest only mortgage. In that case after all deductions we'll definitely be making a small loss each year. So i guess we just declare everything and when the tax office work it all out they'll move our loss amount to the next year.

Thanks again!

Fire_Fox

The rules on what you can claim are slightly different for the first and for subsequent tenants. For the first tenant you cannot claim the 'finders fee' from the letting agent, for example.

westv

As it seems so hard to make a profit it makes me wonder why anybody would want to go into buy to let apart from cases like the OP who would rather let then sell in the current market.

carolt

No-one in their right mind would on an interest-only mortgage! In a falling market!

I thought the point of buy-to-let was that the tenant was paying your mortgage, not that they were paying part of an interest-only mortgage, leaving you to pay the rest, whilst your equity fell further...