Tax on Rental Income

kylie_206

Hi
I hope somebody can offer me some advice on my query.

I have just let my house out and have done everything correctly. (consent to let, l/lord insurance etc)
My next thing to sort out is paying tax on the income. I have worked out that 12 months rent will come to £5940 minus £598 insurances, appliance cover etc minus £2719 mortagge interest payments - this leaves £2623 profit!?

Does anybody know how much tax I will have to pay on this? I am employed and work part time.

Thank you for your time and any advice you can give me.

00ec25

assuming you have a standard tax code of 647, then add £2,623 to your total income from all other sources (eg. gross income from your job, any interest on savings etc) and if this total is more than £43,875 you will now be a higher rate tax payer and will pay 40% on the amount in EXCESS of 43,875
if you remain below £43,875 you remain a standard rate tax payer @20% - assuming your part time job earns more than 6475 pa you will therefore pay 2623 x20% = £524,60 in tax

assuming you let the house out after April 2010 you will of course need to inform HMRC during the current tax year (10/11) that you now have a rental business and probably will be required to do a self assessment tax return for 10/11 - paying the tax due by January 2012 at the latest. If let before April you need to do the 09/10 tax return by Jan 2011

kylie_206

Thank you for the reply.
Property will be let out from end of this month.
I earn approx £9k from my part tiem job so it will be 20% I think.
Thanks again

ceeforcat

Is the house furnished? If so, you will be able to claim 10% of the gross rental income (less rates) as wear and tear of furniture and fittings allowance whether or not you incur such expense annually. Alternatively, you can claim the actual cost of such items as and when they occur.

izsushant

What about if you have £0 income otherwise. Would you still be taxed 20% or would it come under the tax free allowance?

00ec25

izsushant wrote: »

What about if you have £0 income otherwise. Would you still be taxed 20% or would it come under the tax free allowance?

as above, it forms part of your total income assessed against your income tax rate after personal allowances are taken into account. If the net profit amount is greater than your tax code you will pay tax!

This is why the property is often owned 100% by the person paying the lowest tax rate rather than being joint owned by for example a 40% and a 20% payer who will have to pay 40% tax on half the income
of course it does mean you have to:
a) trust the OH if not married and therefore less able to get a share under a divorce settlement
b) will incur CGT implications from only having a single owner

kylie_206

Hi

Yes the property will be furnished.

Thank you for your help all.

My next queries will be about CGT - which is even more confusing!!

00ec25

kylie_206 wrote: »

My next queries will be about CGT - which is even more confusing!!

to get you started...


1. the entire period you live in it as your main home is 100% exempt from CGT

2. from the date you move out and it ceases to be your (live in) main residence, you have 36 months in which to sell it and not pay any CGT at all ("3 year rule")

3. the gain subject to CGT is the difference between original purchase price and what you sell it for (the value when you move out is irrelevant) and is pro rated across the ptotal period of ownership (counted in months) split into the period when you lived in it plus the last 36 months (the exempt amount £) and the period it was let out (CGT liable amount £). eg: owned for 10 years, lived in 6 years then moved out 4 years ago, so exempt period (6+3)/10 = 9/10 and the liable period is (10-6-3) /10 = 1/10, ie 10% of the total gain

4. in addition to the 3 year rule, because you have previously lived in it as your main home, you are entitled to claim lettings relief which reduces the size of your gain by up to £40,000

5. each owner is entitled to an annual personal allowance (£10,100 - at the moment !!!) plus the lettings relief reduction

6. the CGT liable amount calculated in point 3 will be the amount remaining after you deduct 4 and 5 . if this is nil (or negative) you will pay no tax

kylie_206

Wow impressive thank you so much

I have lived in it for 8 years and paid £56k for it - at the moment they are fetching around £125k but I will have to wait until I decide to stop letting it out etc to work out the rest I think!?

Thank you so much for your very helpful response - I will save it and I certainly have a clearer picture than I did have before!

Thanks

Jimbo333_2

Sorry to jump in on your thread OP, but I have related BTL questions

ooec25: This is why the property is often owned 100% by the person paying the lowest tax rate rather than being joint owned by for example a 40% and a 20% payer who will have to pay 40% tax on half the income
of course it does mean you have to:
a) trust the OH if not married and therefore less able to get a share under a divorce settlement
b) will incur CGT implications from only having a single owner

So, if a married couple are in different tax brackets, lets say one is midway into 20%, other not far into 40%, the only negative in going for the lower taxee as sole owner (assuming a strong marriage!) is that in the future you may have only one CGT allowance, not 2 allowances?

What is the formal/HMRC line on this? Years ago, this sensible approach would have been considered "good business", "tax planning" or merely "common sense"! Now, I fear that HMRC would see it as Tax Avoidance (NOT evasion).

Should it come down to who provided the deposit?

BoGoF

Nothing to do with who provided the deposit. If the property is in joint names any income will have to be split 50:50. The only other option is to legally transfer ownership to the person you want it be taxed on - hence the potential future problems.