BTL income tax

Zammo

I'm about to rent a property as I am moving in with my girlfriend. I am also thinking of buying another property to rent as I have a large amount of cash saved and a lot of equity in property number 1.

Am I right in thinking that for tax purposes the entire rental income will be combined with my salary. I'm a little concerned that this will then push me into the 40% tax bracket.

Or do you only pay tax on rental profits??

:rolleyes:

Neal28

As far as I am aware, As a recent newcomer to BTL Tax Returns, the whole rental income from your property will be considered along with your salary to calculate your tax contributions.

However, you will be able to claim relief on things like Letting Agency fees; something like 10% of total yearly rental income as a wear-and-tear relief; and, importantly, the "Interest part" of any loan (i.e. the interest portion of a mortgage if it's a Repayment mortgage or all of the cost if you are on an Interest-Only mortgage) Also, you can claim relief on certain parts of the upkeep and repairs etc. which helps bring down the eventual liability.

It will be different for each person's financial situation, but if you can get an Interest-Only mortgage where the rent you receive roughly covers the cost of the mortgage each month, I think you will essentially be equalising your tax liability while still having someone else pay all your mortgage.

So the answer to your question is "Yes"...I think. :rolleyes: You are right that the whole income is taken into consideration, but you do get tax-relief for certain aspects which will reduce your liability. And if you get an Interest-Only mortgage, you should look for one where you will be able to make regular over-payments so you can pay off the capital outstanding should you wish to do so. This way, you would have the benefit of qualifying for relief on the whole of your rental income, while also making (at least some of) the capital repayments you would be making on a Repayment mortgage anyway, thereby reducing your debt.

Hope this helps to point you in the right direction.

Bean_Counter

Here's a link to HMRC discription of the wear & tear allowance:

http://www.hmrc.gov.uk/manuals/pimmanual/PIM3200.htm

mike3000

You wont be able to claim any interest if you remortgage the 1st property to use the money on your own house but you will if you use it to purchase a second rental property.
As i understand rental from property is classed as unearned incolme and is taxed at 40% but i may be wrong as my accountant is just about to get shot (see my other recent posts)

You can deduct ALL out goings for the rental property, repairs, agent fees etc but not the cost of improvements (ie double glazing, unless it is not economical to repair the existing windows)

Also you will be liable to CGT on the property when you sell, but only for the period of time it has been rented. Get a writen valuation prior to renting as this will prove what the property was worth when you rented and any increase from when you purchased to this date will be free of CGT.

ShoesAreDamnExpensive

Neal28 is right - the rate of tax you pay on your rental income depends on your other income so it will only be taxed at 40% to the extent hat you have no basic rate band left.

Work out your net profit from the rental first - there are leaflets available on the HMRC website detailing what you can and can't claim. If it's rented furnished you can claim a 10% wear and tear allowance each year but you then can't claim for replacing furniture etc when it needs replacing so you have to decide which will work best for you.

Capital items such as double glazing etc is capital expenditure and so keep a note of it for when you sell the house.

If you no longer have a mortgage on the property you are letting out you may be able to remortgage without buying another property - HMRC recently issued new guidelines on this but it is very easy to do it the wrong way which would void the interest being deductibles so get professional advice. As far as possible always keep the loans on the let properties as the interest will qualify for a tax deduction wheras a loan on your own home won't.

cash99

mike3000 wrote: »

You wont be able to claim any interest if you remortgage the 1st property to use the money on your own house but you will if you use it to purchase a second rental property.

As i understand rental from property is classed as unearned incolme and is taxed at 40% but i may be wrong as my accountant is just about to get shot (see my other recent posts)

Both wrong.

You can claim the interest on a remortgage up to the value of the properties when first introduced in to your lettings business.

Rental income is classed as unearned income, but this does not impact the amount of tax you pay. You tax is calculated based on your total of earned and unearned income and where the total falls with regard to the basic and higher rate bands.