How to reduce tax on rental income

sferguson91

One thing I would like to add. It's a great way of saving money to take advice from us at this forum, but we all make mistakes - whether it be misinterpretation or whatnot. I'm happy to give anyone my opinion on a tax matter but to cover yourself, i would speak to your local tax inspector and try to get a query in writing to cover your back.

GARDINER

It's very simple - the interest upon which you can claim tax relief for a rented property is limited to the amount paid for the property, if purchased specifically to let out, or the value of the private residential property when first let and it doesn't matter where the loan is secured.
As far as the new kitchen is concerned - they have a limited shelf life where tenants are involved and it could be argued that it was simply a repair unless of course you install a £10000 kitchen in a 2 bed mid terrace worth £95000

MarkyMarkD

I think most things are repairs, unless taken to extremes. HMRC even accept (I believe) that replacing single-glazed windows with double glazing counts as a repair now (although they didn't used to).

GARDINER

MarkyMarkD

Yes that's correct.

Chief1975

Dear All,

Currently working out my self assessment for 2007-2008, having read through this thread I am still not sure whether it is applicable in my situation or not.

Purchased property A when I was single for £70,000 Sept 2002, mortgage borrowed £60,000
Moved into property B, purchased £250,000 joint owned with girlfriend Sept 2007
Property A rented out (still in my name) Jan 2008, property empty between Sept 07 - Dec 07, current market value of property A £110,000, mortgage left £50,000.

To be honest it wasn't my intent to start a "letting business" although it wouldn't be possible for me to meet my half of the mortgage payments on property B without the income from property A.

I have no plans to sell property A, more to keep as along term investment.
I suspect the fact that me & girlfriend aren't married may be a problem......well it is for her

Just looking to reduce my tax bill if possible, any help/advise would be appreciated

Thanks

silvercar

The interest on the mortgage on the rental property is an allowable expense against rental income, upto the value of the property when first let.

So it is the value of the property in January 2008 that is the starting point. If the mortgage at this time was less than the property value then all the mortgage interest (but not capital repayment) would be an expense.

If you are also asking whether some of the interest you pay on your joint mortgage would also be allowed as a letting expense (on the grounds that some of the money for your letting business was secured on your residential property), I don't know if the fact that one is jointly owned and one in your name would affect this.

Chief1975

Thanks for that, so if I work out the interest I am paying on the mortgage each month, then deduct that from the monthly rental income, the figure left would be what I am taxed on?

I have read on this board that I am also allowed to deduct 10% per month for wear/tear etc?

silvercar

10% wear and tear is for furnished properties. You can also claim agents fees, insurance, costs of repais and maintenance, gas certificate etc as expenses.

MarkyMarkD

silvercar wrote: »

If you are also asking whether some of the interest you pay on your joint mortgage would also be allowed as a letting expense (on the grounds that some of the money for your letting business was secured on your residential property), I don't know if the fact that one is jointly owned and one in your name would affect this.

No reason why not. That is our situation - joint mortgage on residential property; rental property owned 100% by my wife.

Part of the mortgage balance is to fund the rental property.

It makes no odds whose name the mortgage borrowing is in, IMHO, although I'm not sure you can push the logic to the mortgage being solely in the "wrong" partner's name, or whether being married (or not) makes a difference.

Anon

Thank you for the detailed comments in this thread. I have just been reading through earlier threads, and a few things puzzled me about some of the areas covered in this one.

In the above scenarios (where loan has been secured as a residential mortgage against home property but effectively as a loan to the business where interest payments can be claimed against tax)

1. Could/should the mortgage arrangement fee also be claimed against tax? I appreciated that the cost of searches, solicitors etc involved in buying the home property itself would not be legitimate, however, the mortgage arrangement fee is in this scenario a cost of arranging the loan (effectively interest in advance).
2. If you can claim the interest payments on a loan up to 100% of the value of the property at the time it is first let, where do you get the 100% value from if you don't sell it or get an estate agent in (I know you could go from land registry for similar sized properties selling on the same street at the time, but what would HMRC use as the basis if you are letting out your former home?
3. The market has significantly changed since a property was bought and is now (potentially ... likely!) worth a significant % less than it was when you bought it - does this affect your 100% amount you can release (I know you cannot release more than 100% of the value of the property at the time it is let, but assuming that you had not released all the equity at the time, if you wanted to release more capital now, could you still work on the 100% of value at that time even though it is no longer worth that?).
4. With the falling market, if the rental payments are now not covering the loan repayments, is there a limit to how much of a loss you can report in your tax return and for how many years if you keep rolling it forward? Clearly, property is a long term investment (at MarkyMarkD said back in March) which is why you may have invested in the property and the hope is for growth in house prices for a capital gain, but what if there isn't for a while (which is likely now) and expenditure is likely to outstrip income for a while?

Many thanks

Anon