Back to Back Letting for personal use tax question?

by Readers Question

11:51 AM, 30th April 2017
About 2 years ago

Back to Back Letting for personal use tax question?

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Back to Back Letting for personal use tax question?

My conundrum is that we need to rent a new property so we plan to rent our existing personal property and then rent another property to live in.

I am sure many people are in the same situation.

however the question I have is around tax.

Lets say I rent my flat for £2,000 a month and the rent I need to pay on my new property is £2000 per month. I thought there would be no tax to pay but I understand I would have to pay 40% tax on the rent I receive from my current property because I am a higher rate tax payer.

Are there any ways you can offset the rents? I did consider setting up a company just to run the rent through and it would net out to 0 and would effectively be a zero sum game or arbitrage letting business.

Any thoughts as it seems a lot of people must have similar issues.

Simon



Comments

Neil Patterson

11:54 AM, 30th April 2017
About 2 years ago

Hi Simon,

You are likely to be correct and have to pay High Rate Tax on your rental income as you can't offset the cost of your main residence.

However it would be wrong to assume this or what your option may be at this stage as we don't really know anything about your circumstances.

Please see our tax planning page and free tutorials here >> https://www.property118.com/tax/

You may then need a consultation with Mark if you think it is appropriate after reading up.

simon roberts

12:06 PM, 30th April 2017
About 2 years ago

My circumstance is i earn at the top rate of tax. I own a property that is now too small (additional child) and plan was to rent our place and rent another with an extra bedroom. The problem however is i would pay 40% on my rental income that i planned to pay most of the new rent. I am sure there are ideas to work around this. Perhaps get my tenant to pay my landlord directly or using a company to net out the rental. I imagine 100s thousands are doing something as in london especially renting out existing and then renting a new property is more often the norm. Maybe i am the only one thinking about the tax question.

Puzzler

12:44 PM, 30th April 2017
About 2 years ago

Would be interested to know but I suspect you can't. For example if you receive bank interest it is taxable but interest you pay such as personal overdraft or card charges is not deductible...

Mark Alexander

14:55 PM, 30th April 2017
About 2 years ago

If there is a way around this I would like to know too.

Sorry, but I think you will have to pay the tax.

The ideas you have suggested seem like evasion at worst, abuse at best which is covered by GAAR legislation.
.

Jon D

22:57 PM, 8th May 2017
About 2 years ago

One option would be to setup a Ltd Co. to receive the rents and leave the funds in the Co. if you are not desperate for the money.

You can squeeze out tax free dividends of just 2K per year (unless you receive divis from elsewhere), pay yourself tax-free mileage @ 40p per mile etc. Then when you become a basic rate tax payer you could start paying yourself money from the co. Would work best over short-medium term.
However, all depends on your circumstances and timeframe,

Mark Alexander

23:01 PM, 8th May 2017
About 2 years ago

Reply to the comment left by "Jon Delorean" at "08/05/2017 - 22:57":

Sorry but that doesn't work. It falls foul of GAAR legislation in terms of alienation of income. If you transfer an income source to a lower tax environment without also transferring the asset HMRC have the power to make you pay back all tax saved and to fine you.
.

Jon D

14:35 PM, 9th May 2017
About 2 years ago

Can you elaborate? Could he perhaps pay the monies to his spouse for example (listed as a Director) who is a basic rate payer and in order to use up personal allowances in full, as Husband & wife Directors often do.


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