Offset rental income against rent I pay?

EB69

I wonder if anyone here can offer me some advice please.

I currently own a property which I have lived in for a few years. I want to sell the property, but for various reasons this is not feasible at the moment (negative equity, fixed rate mortgage with redemption penalty, etc) and I am therefore thinking of renting it out. I will then in turn rent an alternate property until such time as I can sell my current home.

Having carried out a little research, I understand I can rent my property out for around £1,200 per month. However, the rent on my new property is likely to be in the region of around £1,500 per month.

I know I can offset certain expenses against the rental income (mortgage interest, agents fees, service charges etc) but will I still be liable on tax for that full figure? Or can I offset it in some way against my new property? Otherwise, I find myself in a position where I am renting my property for £1,200, netting perhaps around £900, and if I have to pay tax on that I'm only going to clear about £500 per month towards my new rent of £1,500, so for a property woth £300 per month more it will cost me an extra £1,000!

Does this sound right, or have I missed something?

Thanks for any advice.

Werdnal

Your own rent has nothing to do with the actual expenses of renting out your other property. Its the same as any income - what you spend it on has no relevance to how much tax you pay on the income/earnings you receive. Next you will be asking if you can use your rental income to pay for your weekly shopping, fuel for your car and your telephone bill and offset that against tax!

Indeed, renting a property is not guaranteed income by any means - there are costs and expenses on the rental property and if you are going to be running it at such a minimal profit, how are you going to be able to afford to cover repairs, voids, loss of rent, insurance etc. If you cannot easily cover your own renting costs, how are you going to deal with a major repair bill on the rental property - LL's have a duty to repair faults quickly, otherwise tenant can withhold rent or report you to the Environmental Health department at the council. In any 12 month period, it is usually recommended to only count on maximum of 10 months rent, as the rest goes in losses, costs and repairs - and that is a good year!

Are you aware of all the costs and legal requirements of letting? Asking such a basic question suggests you may have a lot to learn. Read this:

http://forums.moneysavingexpert.com/showpost.php?p=41160642&postcount=12

and all the links it contains to find out how you should be doing it, and the costs and pitfalls involved.

PS, just noticed you have a mortgage as well. You can offset the interest portion of the mortgage against any tax due, but have you actually asked permission from your lender to let it. Alarms bells of negative equity and fixed rate suggest they may refuse consent to let, or if they agree, they will add additional costs to your monthly payments to cover the higher risk of you not living there. Some lenders refused completely as its against their mortgage policy, and if you were forced to convert to a specific BTL loan, the redemption fees you have already mentioned will probably be dropped on you into the bargain!

EB69

Werdnal wrote: »

Your own rent has nothing to do with the actual expenses of renting out your other property. Its the same as any income - what you spend it on has no relevance to how much tax you pay on the income/earnings you receive. Next you will be asking if you can use your rental income to pay for your weekly shopping, fuel for your car and your telephone bill and offset that against tax!

I'm certainly not looking to offset my everyday living expenses against income I receive and there was no mention of such in my question. I was simply trying to work out how to go about moving to another area at a time when I cannot sell the property I am in.

Werdnal wrote: »

Indeed, renting a property is not guaranteed income by any means - there are costs and expenses on the rental property and if you are going to be running it at such a minimal profit, how are you going to be able to afford to cover repairs, voids, loss of rent, insurance etc. If you cannot easily cover your own renting costs, how are you going to deal with a major repair bill on the rental property - LL's have a duty to repair faults quickly, otherwise tenant can withhold rent or report you to the Environmental Health department at the council. In any 12 month period, it is usually recommended to only count on maximum of 10 months rent, as the rest goes in losses, costs and repairs - and that is a good year!

I'm not looking for guaranteed income. I am simply looking at whether there is a legal and above board way of offsetting the rent received on one property against the rent paid for another. I will not be making any profit on the transaction hence my question as to whether tax is payable or not.

Also, I said nothing about not being able to afford the difference in rent. My salary more than covers my own expenses and will cover the difference that I need to pay for my new property. However, in the interest of becoming a "Money Saving Expert" I wanted to check the options.

Werdnal wrote: »

Are you aware of all the costs and legal requirements of letting? Asking such a basic question suggests you may have a lot to learn.

Thank you, yes I am fully aware of the costs and legal requirements of letting. I already let out another property which is maintained to a high standard through reputable agents. My question did not relate to letting the property, but was a general tax question since I have always owned my own home and have never rented a property before.

EB69

I've not yet approached the lender as I am still only just considering the move.

Thanks for your advice though. I am very concerned not to fall foul of any rules.

Werdnal

Excuse me if I appeared judgemental in my earlier reply, but we do get daily questions from people unable to sell their properties and wanting to let them. They assume that is it just get a tenant in and rake in the rent, so my general reply was the same as to anyone else asking such a question, to help guide them into what is actually required.

You did not state you were a experienced LL, so I had no way of knowing whether this was your first let, and thus erred on the side of caution and drew attention to many issues that are overlooked by newbies - apologies.

However, the answer is the same - your own rent payable on your own rented property and the rental income on the property you let are 2 totally unrelated issues, so you cannot offset tax on rental income against your own rented home cost.

EB69

Not at all Werdnal - I am grateful for your experienced reply. I am sorry if my post made it appear that I was trying to make a quick buck (not, of course that I'd be against that but it wasn't my intention this time :rotfl:)

I am all for paying tax on income... but equally all for minimising unnnecessary liability too.

kingstreet

Here's a link to a list of allowable expenses;-

http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnPropertyAndRentalIncome/DG_10014027

Do you have a repayment mortgage? Have you considered asking your lender to change it to interest-only when you seek consent to let?

It may be a forlorn hope, but you never know...

Kynthia

As stated above, rent you pay out is your own living expense and completely separate from your rental business. Only expenses that are wholly and exclusively as a result of renting out your property can be deducted.

An accountant maybe able to help you minimise your tax liability as they may suggest calculating phone calls, stationary, milleage, etc. The most obvious ways are easy enough to calculate on your own such as mortgage interest, 10% wear & tear (furnished only), agency costs, LL insurance, etc.

Fire_Fox

If you are aware of all the issues surrounding letting because you are already a landlord you should be aware of the raft of information on the HMRC website as regards offsetting.

EB69

Fire_Fox wrote: »

If you are aware of all the issues surrounding letting because you are already a landlord you should be aware of the raft of information on the HMRC website as regards offsetting.

I had already looked at the HMRC website before coming here but still thought it was worth asking the more experienced users of this forum. Apologies if that was in someway wrong.

Werdnal

EB69 wrote: »

I had already looked at the HMRC website before coming here but still thought it was worth asking the more experienced users of this forum. Apologies if that was in someway wrong.

I don't think the suggestion was that it was wrong of you, but having viewed the rules in black and white on a government tax website, you then come and ask a bunch of unqualified strangers for their comments on the subject! Whilst it is flattering that you think some users here have more experience in letting, who are you more likely to get the "horse's-mouth" version of the regulations from?

I have read some very poor advice here, and frequently wince at some of the replies on very important legal regulations. Being more experienced, may mean we have a better understanding of the legislation, or may also mean we have a better understanding of how to dodge the legislation! What proof have you that anyone here is giving you the correct information?

I think FF made the very reasonable assumption that you were asking these questions because you were not aware of the HMRC guidelines for landlords.
If you had already read the HMRC guidance, it is unlikely anyone here would have anything more to add. I'd go by the official HMRC website every time