renting out main residence - tax on rental income

lithe

Hello all. I own a mortgaged flat in greater London and at the moment I'm contemplating moving outside of the M25. I'd still commute into London but I only need to be in the office 2 days per week, I can work from home the rest of the time. I had initially thought about selling the flat and buying something else but I'm not so sure anymore... what if I don't like it there and want to come back? So my plan is to sort of "try it out" for at least one year and ask for consent to let, instead of placing it on buy to let.

I've started reading about renting out my main/only property and I have to say I'm a bit confused with the way things work, when it comes to paying tax on the rental income.

current property value ~ £400,000
mortgage left ~ £182,000
interest rate: 2.34% (fixed rate, ending mid-next year)
monthly mortgage repayments: £1000 (out of this, about £380 is interest, rest is capital repayment)

flats are renting for £1300-£1400 pcm in my building - let's say £1300 for the sake of the argument - this is unfurnished, bills not included

service charges & ground rent is £900 pa

Would this work? Can someone help me with the calculation, does this look profitable at all? (I'm not necessarily looking to make money, I'd be happy if it all "pays by itself")

thanks

lovinituk

Are you a higher rate tax payer? Are you aware of all the rules and regulations of being a landlord?

lithe

I'm higher rate yes, have just become.

I'm trying to ballpark it first to see if it's even worth looking into it...

I did check on the Gov website re: the responsibilities of a landlord re gas, electric safety, epc, repairs and maintenance etc).

teddysmum

Have you considered the living costs of your new (temporary?) home ?

lithe

Yes I have... I'd move to an area where rent + other house-related expenses would be roughly the same as now.

Re the flat in London, my hope is that rental income is sufficient to cover monthly mortgage repayments, insurances, service charge, letting agents fees, and maint/repairs costs, but perhaps that's optimistic. Also I'm still unsure about the tax liability - what exactly do I need to pay tax on and how much.

sparky130a

lithe wrote: »

Yes I have... I'd move to an area where rent + other house-related expenses would be roughly the same as now.

Re the flat in London, my hope is that rental income is sufficient to cover monthly mortgage repayments, insurances, service charge, letting agents fees, and maint/repairs costs, but perhaps that's optimistic. Also I'm still unsure about the tax liability - what exactly do I need to pay tax on and how much.

50d the tax, how about void periods etc....

00ec25

lithe wrote: »

Hello all. I own a mortgaged flat in greater London and at the moment I'm contemplating moving outside of the M25. I'd still commute into London but I only need to be in the office 2 days per week, I can work from home the rest of the time. I had initially thought about selling the flat and buying something else but I'm not so sure anymore... what if I don't like it there and want to come back? So my plan is to sort of "try it out" for at least one year and ask for consent to let, instead of placing it on buy to let.

I've started reading about renting out my main/only property and I have to say I'm a bit confused with the way things work, when it comes to paying tax on the rental income.

current property value ~ £400,000
mortgage left ~ £182,000
interest rate: 2.34% (fixed rate, ending mid-next year)
monthly mortgage repayments: £1000 (out of this, about £380 is interest, rest is capital repayment)

flats are renting for £1300-£1400 pcm in my building - let's say £1300 for the sake of the argument - this is unfurnished, bills not included

service charges & ground rent is £900 pa

Would this work? Can someone help me with the calculation, does this look profitable at all? (I'm not necessarily looking to make money, I'd be happy if it all "pays by itself")

thanks

working only with the figures above and ignoring the myriad of other costs associated with letting properties plus all other tax aspects of being higher rate....

gross rental income: 15,600 pa
service charge 900
net taxable profit: 14,700

tax on profit @40% = 5,880

tax relief on mortgage interest (capped at basic rate)
approx £380 interest x 12 months = 4,560 x 20% =£912

net profit after tax and relief : 14,700 - (5880-912) = £9,732 pa

https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income

https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies

CASH "profit" on rental
post tax profit: 9,732 less mortgage capital repayments (1,000 - 380) x 12 = 7,440 = 2,292

you would have a small amount of cash left after paying tax and the mortgage with which to cover all the other costs. As a finger in the air it will "wipe its face" and therefore may be worth considering to maintain a foothold in the London property market and/or because it won't cost you too much if the bills are bigger than you think

lithe

Thanks a lot. The letting agents fees, insurances, and maintenance/repairs are allowable expenses that could reduce the taxable profit, no?

Pixie5740

Yes, any expenses you have to pay for will reduce your profit.

Thrugelmir

You also need to factor in a potentially higher interest rate if you were to let the property.

AlexMac

If you like the London property and it's in a reasonable area, the idea of keeping it seems sound. Any friends I know who've moved out of London and then tried to move back, have suffered from lower house- price -inflation in the provinces compared with that in the Capital. Looked at longer term, it might also let you test whether BTL is something you're up for. And if you're already earning upwards of the mid £40's, you can probably cope with the loss of rental income during the odd void period, or the unexpected (but in my experience inevitable) need to immediately replace boilers, washers, showers etc when they bust. (I've had to buy a new boiler in every one of the last half-dozen places I've owned!). I've never regretted the one (almost accidental) BTL I picked up cheap 20 years ago; to the point where I bought a second 5 years ago. Both very suitable as BTLs; in commutable bits of London's Zone 3 and both with very low service charges (ex-Council flats in low-rise blocks of traditional brick-tile construction and no lifts so only modest maintenance costs)

And yes; every cent you spend on maintenance, repairs, service-charges/insurances, fees and even related transport and admin can be offset against income (effectively 40% relief) even if the mortgage interest is being progressively capped at 20%. Will your lender jack up the interest rate if you say this is only for a year or so?