avoiding unnecessary tax on rent

Baitmaster

Hi all, hope someone might have some useful advice on this one...

I own a house, but want to move elsewhere without selling. To do this I would let my house to a friend, and rent nearer my girlfriend. By letting, I will be receiving income, which will be taxed, but this doesn't seem entirely right because Im having to fork out elsewhere anyway

Does anyone know a way around this? If I set up a Ltd Co to provide housing services to me, would this be better because the profits made on income could be offset against rent paid out? Is there an alternative that doesn't involve all the clerical whatnot associated with a Ltd Co?

Thanks for any help

silvercar

Mortgage interest is an allowable expense against rental income, as is maintenance, insurance, cost of agent if used, gas safety certificate, tenant deposit scheme costs, etc........

You only pay tax on profits after deducting all your expenses.

tek-monkey

What he said. Your rent is not an allowable though, otherwise you could just rent an expensive place to nullify any tax. Unless I'm missing something?

G_M

Collect the rent you receive in cash. Don't tell your mortgage provider, insurance company, local council, HMRC or anyone else you are letting. Place the deposit in a high interest savings account.

Zero tax payable. Simple!

Baitmaster

Thanks for your responses guys

I'd prefer to keep everything official and above board, to avoid problems later on - e.g. I figure the Insurance Co will find out if there's something I've not told them, right when (if!) I really need them, so what's the point of Insurance if I take this approach?

I also notice a clause in my Mortgage - they "may" increase my rate by "up to" 1% if I let, and 2% if I don't tell them about it. This is "because of the increased level of risk they face". I'm currently £5k ahead on repayments, this will increase over time, total mortgage value around £100k

So my questions are
If my letting income was paid to my Ltd Co, which then paid out the same amount to rent on my behalf, it makes no profit and hence avoids tax. I have no income so I avoid tax. If needs be, Ltd Co could pay me the amount I incur in bills (maintenance etc). Is there any reason I could / should not do this?

By providing an underlying guarantee to Ltd Co, I remain intrinsically linked to the company, hence the mortgage company cannot really claim any change in risk, nor justify additional charges. Can they just do this anyway, without showing justification?

If I don't tell them, and they try and charge 2% extra, in my opinion this is clearly a penalty. I understand penalties are illegal, hence the whole bank charges thing. Is this still the case here, as it is a mortgage?

Many thanks in advance for additional help

CLAPTON

just think about it, if it were true that simply by paying rent to a ltd co one could avoid tax on rental income every single landlord in the country would set up a ltd company.

the extra 1 or 2 % is unlikely to be seen as a penalty as there is lots of evidence that rental businesses are high risk than owner occupiers.

Baitmaster

but this is slightly different, Im not "just paying rent", Im offsetting outgoings against incomings... Im saying that Im already paying out once, that the net result with my proposal is that Im still paying out once, not paying out twice, and then being taxed for having a related income too. I dont see why there should be anything wrong with that? A professional landlord is receiving income on every property, and hence should rightly be taxed on each. Im not trying to do that, just avoid being punished for owning a house and wishing to live elsewhere temporarily for personal reasons

I dont see any legal reason why I shouldnt do this?

As for the 1% / 2% thing, the increase from 1% to 2% is simply an extra fee because I didnt tell them. That, to me, makes it a penalty. The original 1% was due to the increased risk

This should also be considered in repsect of the fact that I am ahead of repayments. If my personal situation changes, I can easily move back in, there is no additional risk caused by what I want to do, this is not a business arrangement

Fire_Fox

What you are proposing is not a new idea, in fact in comes up on this board on a weekly basis. The taxman does not view the rent that you pay to live elsewhere as an outgoing that is essential to the letting of your current home. You are choosing to live elsewhere, for whatever reason, you also get to choose whether you take the 1% increase by telling your lender or the 2% by not informing them.

The sort of person that does not inform his lender of the tenancy would be more likely to void their buildings insurance provider by not informing them, not bothering to get safety certificates in place, that to me represents an increased risk. You've asked for advice and been given the correct answer, there is little purpose in arguing the toss with other landlords when the answer isn't what you want to hear.

getmore4less

Ltd company providing housing would be a taxable benifit.

CLAPTON

Baitmaster wrote: »

but this is slightly different, Im not "just paying rent", Im offsetting outgoings against incomings... Im saying that Im already paying out once, that the net result with my proposal is that Im still paying out once, not paying out twice, and then being taxed for having a related income too. I dont see why there should be anything wrong with that? A professional landlord is receiving income on every property, and hence should rightly be taxed on each. Im not trying to do that, just avoid being punished for owning a house and wishing to live elsewhere temporarily for personal reasons

I dont see any legal reason why I shouldnt do this?

As for the 1% / 2% thing, the increase from 1% to 2% is simply an extra fee because I didnt tell them. That, to me, makes it a penalty. The original 1% was due to the increased risk

This should also be considered in repsect of the fact that I am ahead of repayments. If my personal situation changes, I can easily move back in, there is no additional risk caused by what I want to do, this is not a business arrangement

You can offset the interest on the mortage and lots of expenses against your rental income.

Your capital repayments which are buying you (and not the taxpayer) an asset are not paid by the taxpayer.

Your rent (just like any anyone else renting) is not paid by the taxpayer.

Baitmaster

Sorry if you think Im being argumentative. Im not certain that my questions have been fully answered, and am trying to explore the possibilities so that I fully understand them myself

The first question was, whether there is any legal reason that I can't do this. It seems perfectly reasonable to me that a Company could perform this task, and surely it only pays tax on profits? I dont see why I should pay for an income that Im not really receiving in real terms. This is not a fiddle, and I believe that what I am saying is entirely fair and justified

getmore4less may have answered the question, but I don't understand the implications - are you saying that I would end up having to pay some form of tax anyway? I would appreciate if you could explain a bit more

I understand that there are expenses that I can offset against rental income, and I appreciate your help, but this is not what I am talking about here. I also know "My rent is not made by the taxpayer", and that I am buying an asset without giving anything to the taxpayer, again thanks for your help but I don't see the relvance of this to my question

Second question related to whether a penalty charge is legal. If I tell my mortgage company I am letting, they will charge me 1%. If I don't tell them, they will later try and charge 2%. I WILL be getting the required safety certificates, house insurance etc, I am ahead on the repayments, there is no additional risk to them over and above the original 1%. This uplift from 1% to 2%, to me represents a penalty. The question is whether there is something about a mortgage - e.g. since it is a more complex, non-standard, agreement, outside of standard consumer law etc - that allows this penalty

I hope this clarifies things. Thanks for all your help, but please don't chastise me for wanting to fully understand. The fact is that I will be taxed for an income I don't have, which just doesn't seem right, and I believe this looks like an entirely fair and legal way around it. If I am wrong, please tell me why, not just that I am