Renting and Tax implications

johngc

We are thinking about moving house and one of the options that we are considering is keeping our current property and renting it out. It is a two bed terrace and should rent easily in this area.

We have done our sums and feel we can afford it even though there would be a shortfall of around £100 pcm (rental prices around £525, mortgage £622) and see it as a long tern investment, however I am wondering if there would be any tax implications?

I am assuming that as we are making a 'loss' on the rental there would be no 'profit' as such for the tax man to look at.... is this right or am I being naive?

PasturesNew

That's right. No profit = no income tax.
If long term, then when you sell, you'd need to look at CGT. But that'd be then, not now.

But your shortfall would be bigger than £100.

Agent fees (or advertising/credit checking if you're doing it yourself), maintenance/insurance on a house you're not living in, voids. etc.

Paige

Keep detailed accounts of all your expenditure including mortgage repayments, agents fees, insurances and maintenance costs. When you come to sell your property these can be deducted from your profit and your CGT will be less. The CGT is currently at 40% but you do get an annual allowance on this. Also if the property is in two names you will both get an allowance on this. If you have a look on the Income tax website you will find more info. Paige

paddy's_mum

..and the sheer b*ggeration if you get a swine of a tenant (as I did) who neither pays the rent properly or in full, leaves the place like a tip and then fights tooth and claw every inch of the way into the small claims court to recover the debt owing to me.

Let's put it this way - on 1st August, I sold the property and the money is now sitting in a bank account earning almost as much in interest as it did as rent but I don't have the hassle!

jubblyjimbo

In terms of ascertaining profit, and therefore income tax liability, you can only offset the interest part of your payment against tax. So if you have an interest only mortgage you simply compare rent to mortgage. If you have a repayment mortgage you need to work out or get your lender to tell you how much interest you have paid in the tax year.

Re CGT there was a very generous concession from the tax man called lettings relief. Im not sure if its still a concession or not but your accountant can tell you.

Basically if you lived in the property as your principal private residence for a sufficient period of time (something like 18 months I think) then rented it out, and finally sold it, the last three years of ownership were treated as if you lived there even if it was rented out. Thus capital gains was not charged on the gain arising in either the period of occupation as principal private residence, or the last three years. As i say, very generous. But you need to check it out with your accountant.

Lavendyr

If you're thinking of renting your house out, please do it with great consideration. Having been a victim of a landlord who thought to jump into the BTL market without thinking his finances through, I would implore anyone to consider all the possible costs they could face as a landlord and to factor them all into the equation, as if you were considering a business plan.

- What if the house stands empty for 1 month? 2 months? 3 months? more?
- What if your tenants can't/don't pay on time?
- What if the boiler/heating system breaks down?
- Do you want to manage the property yourself or do you need an agency to do it?

johngc

Thank you all. Lots for me to think about and I guess I need an accountant now! :eek:

Jolly_Saver

Having read these messages, it thought I would give it a go with my questions!!

I have recently purchased a property with 3 other friends - a long term investment.

Following agent deductions etc we will get approx £500 in rent.
I have been volunteered to open an account in my name for the rental income to be paid into, which I will then divvie up and pay each friend say £100 per month. The balance will be left to build up as a sinking fund (we've already got this started) to pay for maintenance of the property etc.

What are the tax implications for me? Should the agent divvie up the income and pay us as we instruct them to? Should I now be declaring this income to the tax man? All in all any advice would be greatly received.

Thanks.

From Need all the help I can get!!

tsb

I think the rent would be classed as profit,if its a repayment morgage.I don't think your morgage payment is taken into consideration re the TAXMAN.Therefore in your eyes(and mine)every month you are £100 in the red,but in the taxman eyes,you have made £525 profit

Jolly_Saver

The property has been purchased outright, therefore no mortgage, so is this classed as pure profit??

jubblyjimbo

Jolly - all income and expenditure, and any tax liability will need to be declared in a tax return at the end of the year. You and your friends will all need to make a return individually. If you do not pay mortgage interest then most of your rental income will be profit.