Second house - Tax

Fuzzythinking

Hi

Since I am planning to move to a new home and I don't plan to sell my first house at the moment. I am hoping someone to rent my house for a couple of years in order to wait at the right time for house market to come back.

In the mean time, do I need to pay any tax after paying my estate agent for looking the house even though i get a very small profit - £50?

By the way, I keep hearing some people have 25 houses renting out. Again do these people need to pay the tax?

FT

agrinnall

Fuzzythinking wrote: »

Hi

Since I am planning to move to a new home and I don't plan to sell my first house at the moment. I am hoping someone to rent my house for a couple of years in order to wait at the right time for house market to come back.

In the mean time, do I need to pay any tax after paying my estate agent for looking the house even though i get a very small profit - £50?

By the way, I keep hearing some people have 25 houses renting out. Again do these people need to pay the tax?

FT

Your post is slightly confusing but I think you are asking if you have to pay tax on any profit you make from renting your first house (after taking allowable expenses into consideration). The answer is yes, you do. if you're not already doing a Self Assessment tax return you will need to ask HMRC to register you to complete one. You won't need to do this before April next year, at which point you will know whether you have indeed made a profit in the 2011-12 tax year.

You'll also need to consider whether you have liability for Capital gains Tax when you decide to sell the first house - I think if it's less than 3 years since you last lived in it you should be OK.

Fuzzythinking

agrinnall wrote: »

Your post is slightly confusing but I think you are asking if you have to pay tax on any profit you make from renting your first house (after taking allowable expenses into consideration). The answer is yes, you do. if you're not already doing a Self Assessment tax return you will need to ask HMRC to register you to complete one. You won't need to do this before April next year, at which point you will know whether you have indeed made a profit in the 2011-12 tax year.

You'll also need to consider whether you have liability for Capital gains Tax when you decide to sell the first house - I think if it's less than 3 years since you last lived in it you should be OK.

Is there any tax exemptation to retain a small profit?

If no, what is the percentage do I need to pay tax?

FT

neverdespairgirl

You also need to consider the costs of converting your first mortgage to one that allows you to rent - either consent-to-let or a BTL mortgage - and whether you have a deposit separate from your first house to fund the second.

zappahey

Fuzzythinking wrote: »

Is there any tax exemptation to retain a small profit?

If no, what is the percentage do I need to pay tax?

FT

There's a whole bunch of things to consider if you want to understand your tax liability but, basically any excess between rental income and allowable expenses (e.g. agency fees, insurance, mortgage interest, etc) is taxable. Note that only the interest element of your mortgage payment is allowable, not necessarily the entire payment.

How much tax you actually pay, and at what rate, is dependent upon how large that excess is and what other income and allowances you may have.

Fuzzythinking

zappahey wrote: »

There's a whole bunch of things to consider if you want to understand your tax liability but, basically any excess between rental income and allowable expenses (e.g. agency fees, insurance, mortgage interest, etc) is taxable. Note that only the interest element of your mortgage payment is allowable, not necessarily the entire payment.

How much tax you actually pay, and at what rate, is dependent upon how large that excess is and what other income and allowances you may have.

Im simply conducting a research before making any decision however I assume I make about £50 per month profit. Hence again I assume that I will have to pay the tax anyway.

By the way, I hear people have over 20 houses and raking a lot of cash without paying any tax (That is what I believe but I might be wrong)

FT

scarletjim

Well if that's true, and they get caught, they would presumably be facing a custodial sentence for that level of tax evasion...

Cleaver

Fuzzythinking wrote: »

Im simply conducting a research before making any decision however I assume I make about £50 per month profit. Hence again I assume that I will have to pay the tax anyway.

By the way, I hear people have over 20 houses and raking a lot of cash without paying any tax (That is what I believe but I might be wrong)

FT

The tax arrangements on renting out 1 or 20 houses is no different from any other self-employed business.

You have income each year, which might be £6,000 in rent from one house or £120,000 from 20 houses. Then you'll have your expenses - repairs, mortgage interest, agency fees, certificates, etc. etc. If your expenses are higher than your income, you'll make a loss, if it's the other way around you'll make a profit. The profit is taxable at whatever rate you're taxed at. I used to rent out a property and am a higher rate tax payer, so I paid 40% tax on any profit.

Regardless of whether you make a profit or loss, you'll need to register for a self-assessment tax form and fill this in every single year, even if you don't make a profit.

In terms of your point that I've highlighted in bold, if someone rents out 20 houses, makes a profit and doesn't pay any tax then they are probably not declaring income, or making up their expenses. This is illegal, but then you probably know that. Same deal as when a plumber says, "I'll do that job for a discount for cash mate, nudge nudge, wink, wink."

In terms of your £50 a month profit, what calculations have you used to work that out?

Fuzzythinking

Cleaver wrote: »

The tax arrangements on renting out 1 or 20 houses is no different from any other self-employed business.

You have income each year, which might be £6,000 in rent from one house or £120,000 from 20 houses. Then you'll have your expenses - repairs, mortgage interest, agency fees, certificates, etc. etc. If your expenses are higher than your income, you'll make a loss, if it's the other way around you'll make a profit. The profit is taxable at whatever rate you're taxed at. I used to rent out a property and am a higher rate tax payer, so I paid 40% tax on any profit.

Regardless of whether you make a profit or loss, you'll need to register for a self-assessment tax form and fill this in every single year, even if you don't make a profit.

In terms of your point that I've highlighted in bold, if someone rents out 20 houses, makes a profit and doesn't pay any tax then they are probably not declaring income, or making up their expenses. This is illegal, but then you probably know that. Same deal as when a plumber says, "I'll do that job for a discount for cash mate, nudge nudge, wink, wink."

In terms of your £50 a month profit, what calculations have you used to work that out?

Since I am no expert in tax, this is why I came to this forum to learn widsom from you guys. Now I know it is illegal not to pay any tax on profit.

Again I assume, the rent would be £430 minus £330 morgtage and £50 (Estate Agency fee) and the leftover would be £50.

FT

Cleaver

Fuzzythinking wrote: »

Since I am no expert in tax, this is why I came to this forum to learn widsom from you guys. Now I know it is illegal not to pay any tax on profit.

Again I assume, the rent would be £430 minus £330 morgtage and £50 (Estate Agency fee) and the leftover would be £50.

Is that mortgage full repayment or interest only? I'm assuming it's a capital repayment mortgage as you're living there at the moment. I'm going to assume that £250 of your mortgage is interest paymentand the other £80 capital, for the purposes of my calculations. I'd work it out like this:

Yearly Income
10.5 x £430 = £4,515.

I'm assuming 10.5 months as most landlords would assume that 1.5 months a year, on average, will be void months with no one living in the home. You should work it on on less though, just to give you an idea.

Expenses
Agency Fee = 8% of rent, so £361 a year. I'd get an agent to manage this for you, as you don't sound an experienced landlord. My old agency charged 12% but I got them down to 8%.
Gas and Leccy Safety Checks = £150 a year
Landlord Insurance = £150 a year
Mortgage Interest = £3,000 a year
Mortgage Capital = £960 a year
Maintenance = £316 a year (I rented a property for a number of years and found that on average we paid out 7% on fixing stuff, so I've assumed the same for you. Tenants will probably ask for things to be fixed that homeowners might just leave be, quite rightly really).

Total Expenses = £4,937

So, according to my very basic fees (but hopefully quite realistic) you'd be running a loss of £422 a year, or £35 a month. So you'd have no tax to pay, as you'd make a loss. You'd still need to fill in a tax form though.

However, what I've not included here is the obvious fact that your tenant would be paying your mortgage off for you. So although the place would run at a small loss, you'd end up getting your mortgage paid after 25 years or so.

If you take the capital part out of your mortgage, your income is still £4,515 and your expenses would be £3,977. Which kind of puts you in profit. But I just left capital in to point out that the rent probably won't cover all your expenses on a proper repayment mortgage.

Obviously I've not included any additional mortgage fees (your mortgage rate would probably go up) and you might have to pay out some initial finders fees to an agent and maybe some work on your property to get it up to scratch in terms of gas, leccy etc.

Hope this helps.

scarletjim

Fuzzythinking wrote: »

Again I assume, the rent would be £430 minus £330 morgtage and £50 (Estate Agency fee) and the leftover would be £50.

FT

I believe only mortgage INTEREST is deductable as an expense - so if that's an Interest-Only mortgage then fine, but if not then you'd need to find out what the interest element is (your lender can tell you easily), then only that bit can be removed. Obviously this makes your position worse, as your profit would be deemed higher than in your calc, so you would have to pay more tax.

EDIT: Oops someone beat me to it