Will I have to pay tax on rental income or not?

by Readers Question

13:30 PM, 6th April 2013
About 8 years ago

Will I have to pay tax on rental income or not?

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Will I have to pay tax on rental income or not?

Will I have to pay tax on rental income or notI am currently looking to buy a (probably) new property for the sole purposes of letting it out.

I currently own my own home and do not have a mortgage on it, n or do I have any other debt.

I plan to use a Buy to Let mortgage (60 LTV) to buy this rental property over 13 years till I retire.

Am I correct in thinking that as long as my rental income is NOT greater than my monthly repayments, then the rental income is NOT liable for income tax???

Once the mortgage is paid off ,then rental income is liable for income tax??

Also to confuse matters, I am mortgage free and people keep suggesting that I raise the money by mortgaging my own home. But my understanding of this is that I will get a different mortgage product to simply BTL, and the interest rate will be the normal rate. But all Rental Income is then taxable???

I am also a 40% tax payer.

Can people confirm my thoughts above are indeed correct please? Or if they are not, can you clarify to me where I am incorrect?

Thanks in advance!!!

Hotplate


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Comments

Mark Alexander

13:45 PM, 6th April 2013
About 8 years ago

Hello Hotplate

Your net rental income will be taxable. You will be able to offset expenses against the income to reduce your taxable profits including mortgage interest. It makes absolutely no difference how you borrow the money to purchase your buy to let property, it can be with a buy to let mortgage or a mortgage on your own home, you will still be able to offset the mortgage interest PROVIDING you can prove the purpose of the loan was to invest into a buy to let property. You will NOT be able to offset any capital repayments against rental income though, ONLY the interest.

You will also be able to offset other expenses against your rental income such as professional fees, property management charges and maintenance costs.

When you sell the property you will pay Capital Gains Tax on any profits over and above the price you paid for the property and any improvements you have made to it. Therefore, it is important to keep both profit and loss records a balance sheet showing how much you invested. This is because maintenance and improvements are two different things in the eyes of HMRC.

It is very important that you consider the basis of ownership before you buy the property too, especially if you are married. There are several options to be considered which I will not go into here.

I strongly recommend that you employ an accountant who will be able to advise you the best way to structure your tax affairs, please see >>> http://www.property118.com/index.php/landlord-tax/ A good accountant will save you far more than you pay to them in professional fees.

As you are new to the property business you may not be aware that there are over 100 regulations you will need to comply with when you let the property. Therefore, I suggest you use a good property manager, please see >>> http://www.property118.com/?p=34413 You could try to manage the property yourself but doing so will massively increase you chances of making mistakes. Again, employing a professional money could save you a fortune, not to mention a whole load of grief and heartache!

You also mentioned that you will probably buy a new property. On that basis you will want to be sure you get it as cheaply as possible, please see >>> http://www.property118.com/?p=37592

Please feel free to ask lots more questions using the comments box on this thread.

I hope the above will be useful as a starting point for you.

Regards

Mark

Paul Shears

0:53 AM, 7th April 2013
About 8 years ago

If you raise the money on your existing property as a simple mortgage rather than a buy to let deal, then all other things being equal, the rate will be lower as the risk to the loan company is lower.

Tony Atkins

17:26 PM, 8th April 2013
About 8 years ago

I agree you will almost certainly get a better interest rate and pay lower charges if you remortgage your existing home and use the capital raised to pay 100% cash for the BTL property. However as Mark says, you must be able to show that the capital was used to buy the BTL property, in order for the interest to be deductible against your rental income.

Other smaller-beer costs that are deductible against rental income are insurance, advertising costs, petrol costs used for driving to the BTL property for inspections, maintenance etc, and office costs, which can either be a flat-rate £150 a year or a percentage of your council tax and utility bills at your home (if you can show that X% of your floorspace is used exclusively for running the rental business, or a certain percentage of your phone calls, time spent on the computer etc).

I have found Carl Bayley's How to Avoid Property Tax (published by Tax Cafe) very useful in understanding how to run a rental business tax-efficiently, including how best to handle nasty issues like the hefty capital gains taxes you can face when you sell up. However don't let the tax tail wag the investment dog: the key thing is to buy the right property in the right location where there's a steady supply of prospective private-sector tenants. As a beginner, you can't really beat a 2/3-bed house, moderately-well decorated, on a quiet street near good transport links and some shops, which you aim to rent to an employed couple without children or pets, or maybe two people sharing. Some people may disagree, but larger houseshares, families with children, people on benefits, and executive lets in 4/5-bed houses are more suitable for more experienced landlords.

Puzzler

18:57 PM, 8th April 2013
About 8 years ago

Note you still have to include it on the tax return even if there is no tax to pay. Losses can be carried forward so if you can build up a cumulative annual loss this can help when you come to pay tax on the rent (e.g. when the mortgage is redeemed). Unfortunately this cannot be offset against earned income.


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