Do I have to pay income tax on a rental property if I'm paying a mortgage on another?

MarkBargain

We have a property that we own outright (no mortgage) and are thinking of buying a bigger house (with a mortgage) and selling ours later to pay off a large part of the new mortgage. An estate agent suggested renting out the current house instead. If we rented out the old house (for say £500 a month) and took a mortgage on the new house (for say £800 a month) would we have to pay income tax on the £500? Or would the mortgage offset that somehow for tax purposes?

marliepanda

No. The mortgage on your current house and the rent on the old mortgage free house are separate.

If you had a mortgage on the rental house, you could offset the mortgage interest on that house (not not capital repayments), but your own personal house is completely separate to your business house, so yes you will have to pay income tax as it is income.

MarkBargain

Thanks, that's what I thought. I think I'll just sell the current house and keep things simple!

I suppose if someone wanted to act tax efficiently, they could remortgage the old house that is being rented out in order to offset the income (and buy the new house from capital).

MacMickster

marliepanda wrote: »

No. The mortgage on your current house and the rent on the old mortgage free house are separate.

If you had a mortgage on the rental house, you could offset the mortgage interest on that house (not not capital repayments), but your own personal house is completely separate to your business house, so yes you will have to pay income tax as it is income.

I don't think that you are right about this. In any business (and letting property is a business) then if you borrow money to withdraw capital from your business, then you can claim relief on the interest payments as a business expense. I'm sure that this transaction could be structured in a way that would achieve that.

OP. You may be better off posting this question on the "Cutting Tax" board.

Take_it_like_a_man,_sonny

Wow, do not rush in. You may need more specialist advise before considering your options.

For one, interest payments may be offset on the mortgage on the rented property, so go and see a financial planner. An outlay of £250 here may well be worth a fortune later.

Kynthia

If you take a mortgage in order to buy a buy-to-let then it doesn't matter which property the mortgage is on, you can claim the interest as an allowable expense. If you take out a mortgage on your buy-to-let then you can claim the interest as an allowable expense. However you can't take out a mortgage on another property and claim the interest as an allowable expense if you aren't using the money for your rental business.

MarkBargain

MacMickster wrote: »

OP. You may be better off posting this question on the "Cutting Tax" board.

Thanks , I have posted it there: https://forums.moneysavingexpert.com/discussion/comment/55016755#Comment_55016755

I am almost certainly going to sell my old house to find the new one, nice and simple, but this is an interesting discussion nonetheless.