Tax when landlord rents out somewhere too

lukeh23

I have the following situation and looking from some advice.

I co own a 2 bed flat with any ex girlfriend (we are on amicable terms and work things out ok between us, so there is no topic here). I am now married with a 1 and half year old daughter

Myself and the ex tried to sell the apartment to buy somewhere else, but nothing came to be. During this time of trying to sell my wife and I "rented " the apartment and lived there by covering the mortgage payments each month, this worked out well as it kept the payments up while trying to sell and it was low rent for us as the mortgage was out of any deal and so defaulted to the current low bank of England rate. Ex GF was happy as she knew the mortgage was covered and we looked after the place and kept it maintained.

As we could not sell we decided it would be best to rent the apartment out to tenants. Me and the family would then go rent a small house which would be nicer for the little one so we had a garden and a bit more room. We could then review the market in a couple of years to see if things have picked up.

I am now in situation where we are in a small house where then rent is 900 a month. The apartment is ready to rent, but I am now looking at ways of reducing or avoiding tax on profits (in anyway I LEGALLY can) . I know that I can do this by taking off expenses such as mortgage payments (around 500 each month), insurance etc and after this we have about 200 pounds in profit each month.

I have gone from paying out 500 each month to now paying 900 in rent - this I can accept as we wanted to move on and so we took the situation on, but if I am really honest I don't want to pay tax on the little profit we make as this is lost from renting the new place. The other co owner is also renting and on quite a low salary so she could also use any extra cash she can.

I doubt there may be anything we can do here, but I thought it worth running past you gurus on here?

Also I read something about profit less the 2500 results in getting a lower tax band then your PAYE, but as always with inland revenue documents it left to much to the imagination by not explaining this to clearly? Does this mean that the tax on your property is based on the band of tax you pay based on your current salary? If so would it be based on myself (higher tax band) or the other co owner (my ex on a lower band)?

BoGoF

First of all you can only deduct the mortgage interest not any capital repayments so unless the £500 p/m is interest only then you cannot deduct all of it.

Other expenses, letting agent fees, if it's let furnished 10% wear and tear?

You have got the £2500 limit thing way wrong.....all this refers to is if the profit is less than £2500 then you do not need to complete tax returns if you agree to having your tax code restricted for the property income. You will pay tax at your marginal rate of tax on your share of the profit.

00ec25

BoGoF has covered the main points

just to emphasise, you cannot offset the £900 rent you are paying as a cost against the rental income you receive

so the £200 profit you are making on the flat is indeed taxable assuming a) you have deducted the correct mortgage cost and b) you have included all other eligible expenses

presumably the £200 profit you mention is your share of thenet profit, ie jointly owned 50/50 (or in accordance with your ownership portions between you & the ex, if applic) ?

lukeh23

Sincere thanks BoGoF

It is in fact interest only as neither party wants to invest in it, just try and sell when we can.

if the profit is less than £2500 then you do not need to complete tax returns if you agree to having your tax code restricted for the property income. You will pay tax at your marginal rate of tax on your share of the profit.

Sorry I feel I am being thick here. I understand not needing to complete a return, but not "pay tax at your marginal rate of tax on your share of the profit" -

Where is it taken from and how much / what percentage is taken?

lukeh23

00ec25 wrote: »

BoGoF has covered the main points

just to emphasise, you cannot offset the £900 rent you are paying as a cost against the rental income you receive

so the £200 profit you are making on the flat is indeed taxable assuming a) you have deducted the correct mortgage cost and b) you have included all other eligible expenses

presumably the £200 profit you mention is your share of thenet profit, ie jointly owned 50/50 (or in accordance with your ownership portions between you & the ex, if applic) ?

No the £200 is total - so £100 each.

BoGoF

Say your share is £1000 each, your tax code will be restricted by £1000 which basically means if you are liable to tax at the basic rate of 20% you will pay tax of £1000 @ 20%. Similarly if you pay 40% tax then it will be £1000 @ 40%. This all assumes you are employees and you will then pay the additional tax through PAYE.

p.s. what goes in your tax code will be an estimate until the final year end figure is known.

lukeh23

We are both employees:

This all assumes you are employees and you will then pay the additional tax through PAYE.

So this would mean if profits for year are 1000 each and I am in the 20% tax band as an employee I will be automatically deducted 20% of 1000 over the course of the year? What is the marginal rate you described in your first post?

Annisele

Your marginal rate is the highest rate of tax you pay. So, say you earned £50k per year:

You'd pay no tax on the first £7,475 of your earnings (£0).
You'd pay 20% tax on everything between £7,476 and £42,295 (20% of £35,000).
And then you'd pay 40% tax on the rest of your earnings (40% of £7,705).

So, your highest rate of income tax would be 40%, and so your "marginal rate" would be 40%. If you then earned another £1, that would be taxed at your marginal rate of 40%.

If on the other hand you only earned £25,000, then you'd still pay no tax on the first £7,475 of your earnings. Now you only have another £17,525 (£25k less the personal allowance of £7,475) to be taxed - so you don't earn enough to fall into the 40% tax bracket. So, your highest rate of tax is 20%, and that's your marginal rate.

Does that help?

I've ignored NI as it doesn't apply to your rental income.

(I might have got some of the above figures wrong - you can find the right ones here).