How to reduce tax on rental income

Ranger123

I have read some of the newbie landlord threads but i am still struggling somewhat and would really appreciate some advice on:

a) how to reduce the amount of capital gains tax we could pay on rental income
b) how to calculate taxable income, particularly how you calculate the 'interest only' component if the mortgage is consent to let

Some information that might help:
- my wife and I have lived in the property since 2010 and we are looking to buy another property and rent this house out
- the house and mortgage is in my name
- I am a higher rate income tax payer, whilst my wife is a basic tax payer
- the rent we expect to charge (once we have tenants) is pretty similar to the current monthly mortgage payments
- I am looking to use a property management service
- for ease in this year (whilst trying to sort many things out), I am looking to have a consent to let mortgage but would be happy to hear arguments for going straight to 'buy to let' - although my aim is to fully pay off the property in ten years

Any help would be great.

booksurr

a) you do not pay CGT on rental income, you pay CGT on the gain made when you sell the property (after deducting relief and allowances to arrive at net taxable gain figure)

b) whether a mortgage is consent to let or a BLT is irrelevant. The interest element is the interest element and has nothing to do with the nature of the mortgage. You look at the annual statement from your lender and see the interest figure thereon (or you ask them to tell you what it is if you don''t have a statement to hand)

you are the owner therefore your wife is irrelevant. The fact she is basic rate is therefore utterly irrelevant until you learn a lot more than you know at present, for example.....

if you want to split the income between you and her she will have to become a co-owner. That means putting her on the mortgage (if the lender accepts her) and changing the records at the land registry (DIY or via a solicitor) so she is listed as an owner.

Only once you have done that can you move to the nest step.... given you are married the income must then be split 50/50 by default, unless you submit a Form 17 to HMRC and you own it in unequal shares, your income is then split according to your respective shares. It cannot therefore be owned as joint tenants since that can only be 50/50, it would have to be as tenants in common.

whether you get a choice over CTL or BTL is your lender's decision, not down to your choice. You may be lucky or not as the case may be. A BTL may (normally) incur a higher interest rate, a CTL may (normally) have a time limit after which the lender will require conversion to a BTL

if you currently have a repayment mortgage then the capital repayment element of your monthly payment is a taxable item. That will remain the same on a CTL. Note there are very very few repayment BTL mortgages available, nearly all are interest only (although some of those allow lump sum capital repayments). BTL mortgages are really best obtained via a broker, don't try to DIY as the range of non broker mortgages is tiny

have your read GM's guide to letting as you need to do a lot more research
http://forums.moneysavingexpert.com/showpost.php?p=41160642&postcount=12

and GM's guide to letting agents
https://forums.moneysavingexpert.com/discussion/4765736

if you want to plan for the eventual CGT you will need to do things NOW regarding ownership because if your wife is made co-owner after she has moved to the new property that will be an unmitigated disaster from a CGT planning perspective as she will not qualify for relief and you will lose the respective ownership % of yours

lessonlearned

Buy a copy of the Tax Cafe guide entitled How to avoid paying property tax.

It will set you back about £25 but it is worth its weight in gold and of course even the book itself is tax deductible.....;)

Don't make a move until you have read, digested, and fully understood this little book. Then you can proceed with your plans.

Get your tax situation sorted before you start making money. It will save you many thousands of £s.

(And no I'm not the author)!!!! :rotfl:

kingstreet

Ranger123 wrote: »

particularly how you calculate the 'interest only' component if the mortgage is consent to let

Presumably you mean a repayment mortgage.

To calculate interest element;-

mortgage amount x interest rate = interest paid over year.

To calculate tax position, you take your income, then deduct from it the allowable expenses you have incurred in running your letting business over the year.

The residue is what is added to your income for tax purposes.

Allowable expenses here;-

https://www.gov.uk/renting-out-a-property/paying-tax

Thrugelmir

Your annual mortgage statement will provide you with the amount of interest you pay. This probably won't tie up with the tax year. So obtain the balance at the 31st March from your lender and work the interim period out for yourself.

ellesbellesxxx

We ask our mortgage lender to send us a statement of interest... It is for the tax year.