Can I avoid paying income tax on rent?

Ginger_Winner

I'm planning on buying a second property and renting out my first. I have been told that as long as the income I receive as rental is less than my mortgage then I will not have to pay tax on it. Is this the case? Will I be liable to pay any other tax...?

Hereward

That's not quite true; if your rental income is less than the interest on your BLT mortgage then you will not need to pay any tax on the rental income. This raises the question, why would you want a BTL that makes a loss every month? you would be better off putting your money in a savings account, at least that way you would be accruing interest on you money, rather than wasting it. When you come to sell the property you would have to pay 40% tax on any profit from the sale as it is not your Primary Residence.

Mrs_pbradley936

No it is not true. In the normal course of events any rental income is added to your other sources of income an taxed accordingly. For example if the rental is £3000 per annum (500 x 12 = 3000) that is added to your salary. If you have a regular job and have tax deducted by your employer you would need to fill in additional forms. If you have just the one property I do not think it is worth your while to employ an accountant.

Ali120604

Your mortgage interest may be lower than the rent on the property but you can still minimise tax payments by taking the total of other expenses such as maintenance charges, your expenses such as travel, mobile phone and any property magazines you subscribe to and letting agent fees from the sum of the mortgage interest. All-in-all you should be able to reduce your tax charge to almost nil.

And, Hereward, I wouldn't always agree that putting money into a bank account is better. The bank will pay you around 3.5% interest. If you need to supplement the mortgage on a BTL, it's similar to paying into a pension, you won't get the return until some time in the future and in this case of a BTL it's when you re-mortgage or sell the property (assuming it's gone up in value) but hopefully the increase will be more than the bank rate of 3.5%.

Ginger_Winner

Hereward wrote:

That's not quite true; if your rental income is less than the interest on your BLT mortgage then you will not need to pay any tax on the rental income. This raises the question, why would you want a BTL that makes a loss every month? you would be better off putting your money in a savings account, at least that way you would be accruing interest on you money, rather than wasting it. When you come to sell the property you would have to pay 40% tax on any profit from the sale as it is not your Primary Residence.

I will be getting a second mortgage to pay for my second home (primary residence) but will be raising a sizeable deposit from equity of my first property. So am I correct to assume that my rental income will not be liable to tax up to the level of my interest repayments on my first mortgage?

silvercar

The purpose of the loan is important, not where it is secured. If you are borrowing money for the purpose of BTL then the interest can be put against the rental income as a legitimate expense.

Ali120604

The two properties should be treated as independent properties, what you do to one doesnt affect the other if one of the properties is BTL. You assume correctly, providing you re-mortgage the first property as a BTL (Mortgage 1 cannot be a standard mortgage) - I assume you are as that may be how you are getting the equity out of property 1.