letting a property - what tax do you pay?

[CristinaTheAstonishing]

We are thinking about letting our current property and buying another one to live in. What kind of tax would we pay on the rental income? Thanks.

You declare the net gain in your tax return as income and pay the relevant rate. Net being actual rental income less fees (agency), mrotgage interest and maintenance costs (such as annual Gas certificates, buildings insurance). You can split this income between you and any other co-owner (ie dh/dp) meaning one of you may pay a lesser rate than the other. Longer term it may become subject to Capital Gains Tax should you decide to sell it and not have had it as your principal private residence for a while.

Lizs is absolutely right!

Thank you very much. It sounds quite OK then. I thought the terms would be much more unfavourable but I can see now why people do it. We are very cautious with things like this, but I think we can just about take such a risk. Thanks again.

If you do have a mortgage to pay on the second property - just remember that while the mortgage interest is tax deductible, any capital part of the repayment is not.

Good luck

• as you are buying another to live in, it is sensible to have the one you are letting as highly mortgaged as you can - the interest is allowable against the rental income, you get no tax relief on the other property.

- you may be able to just get approval from your lender to let it out, rather than having to have a buy-to-let mortgage, which may work out cheaper. - capital gains:* as the property has at some point been your principle private residence, then when you do eventually sell it the last 36m of ownership are treated as if you live there, so if you sell after letting for 3 years there will be no capital gains tax to pay. * if you sell after more than 3 years then only the pro-rata proportion of the gain for the time you were letting, less the 3 years, will be subject to capital gains. ie own and live in for 10 years, rent for 5 years, tax on 2/15th's of gain.(not taxed for first 10 years, or last 3 years). * following this, you will then get capital gains lettings relief (more complicated so I am not going to explain) which would reduce any capital gain still further.

4cento - I know a second property would have worse mortgage terms because it's not a first-time buy anymore, is that what you mean?

No, she means, you can't count the whole mortgage payment as an expense - just the interest on it.

No, what you say is true of course, but what I was referring to is that when you make a mortgage repayment, you are paying both interest and capital.

Taking a hypothetical example, say you repay £1,000. Say that £700 of it is interest and £300 is capital repayment. Only £700 would be deductible as an expense against the rental income. The £300 would not be a tax deductible expense.

I get you now, only the interest part of it.

We lived here for 8 years and saw somewhere nearby but I think we're just too scared to move away completely in case we don't like the new area (it looks very sedate, nothing wrong with it, just a bit dull) and in case we want to return in a year or more. We are pathetically unadventurous.

ChasingSquirrels - thanks for the explanation, I think I understand the gist of it. It sounds rather complicated now, all these changes in mortgages.

not really complicated, just some paperwork to fill out. Other things to consider

• would you have enough cash to put down a deposit on a new place (or equity in the old place so that you can remortgage and extract cash for new deposit)
• would the expected rental cover the mortgage
• what are lettings like in your area, are there lots of empty properties
• only factor in rent for 10 months of the year with 2 months empty (not necessarily going to be the case, but if it does happen at least you can afford it)
• would you use an agency or let yourself, agency = 10% (ish? long time since I used one so not sure) of the gross rental, doing it yourself means more hassle (potentially, our agency was crap)

When you say "would the expected rental cover the mortgage" you mean the re-mortgage I suppose? Our current mortgage is v v low as we've paid off part of it over the years but if we re-mortgage then yes, that's a much bigger chunk of money. I think letting will be fine as it's near the station etc. It's tempting to manage it ourselves as we'd be nearby (10 minutes drive), we'll see how much the estate agency charges. 10% sounds quite a lot. Thanks again, lots of things to discuss with DH.

Does anyone know what sort of checks the landlord has to do before they let the property?
Can the tenants sue the landlord if there is an accident etc?

You need a gas certificate from a Corgi engineer type person. That's it, afaik.

Am I not right in saying that you can't remortgage and deduct your whole interest payment only that which has been used to buy the house or do certain agreed improvements? I thought if the equity you released was used to purchase your own home/cruise round the world it wasn't part of your rental property expenditure and therefore couldn't be counted as an expense

If you have any electrical stuff in theproperty it all needs to be checked anually. Yes I think that as a tenant if something is faulty and an accident happens you are liable. Also you will need to take out Landlords insurance, it's not expensive but worth it.

1dilemma - did I get this right? Let's say we now pay £300 a month but if we re-mortgage we might pay £1000 a month. If we rent it out for £1500 a month roughly speaking we'd pay tax on (1500-300) rather than (1500-1000). I guess as long as it pays for itself and we can still buy the other place it's fine.

I'm not sure about what 1dilemma is saying - at least, we were never required to 'justify' our mortgage amount on our rental property.

no I think you could still deduct the £1000 assuming it is all interest only ie. not a repayment mortgage. Also bear in mind you may have to finance it short term between lets ,including Council Tax(which when we did it was 90% for an empty property), utilities etc. Agency rates vary from 5-15%(plus vat) depending on level of vetting and management you choose.

Or if it is £1000 for a repayment mortgage, you can only deduct the £900 or whatever that is interest. Your mortgage provider will give you a statement making clear what annual sum was for interest.

1dilemma is talking about what has been a grey area - and different treatments have been taken by different tax offices.

I'm pretty sure that you can remortgage back up to the original mortgage on the rental property and have all the interest allowable, although some tax offices still argue against this.

They greyer area is the bit between the original mortgage and the equity you want to take out. I know that alot of tax areas do allow this, I also have heard of some which haven't allowed it.

I will have a look at work if I get time.

It isn't really fair, as if you mortgaged to buy a new (rental) property then the whole of the interest would be allowable, but when was tax fair.

I had forgotten that point 1dilemma.

Ok, I bow to CS's clearly greater knowledge on this front!

We discussed this with a mortgage adviser last evening who said we should seek separate tax advice re let-to-buy. I thought that was pretty poor; we haven't paid him but I'd expect if he'd in the end charge £2000 to arrange the mortgages that he'd know a bit about tax as well so we don't fork out more money to someone else. He didn't even volunteer as much info as I got from you guys. So thanks for taking the time. I think we'll be chickening out in the end, or wait until the perfect, perfect house comes along for which we'll be prepared to take this step. According to calculations last evening we'd be forking out £1500 a month for letting our flat and buying a new house, whereas now we pay less than £300 a month in mortgage. A huge difference, so only the best house & area will do

agree for that much of an increase you would want it to be perfect. to be fair to the mortgage advisor, he almost certaintly won't have any professional training in tax laws, and also won't be covered by his professional indemnity insurance in respect of it. tax is a very complex area and it would be better for you to get specialist advice, so he did do the right (albeit seemingly unhelpful) thing.

NQC - obviously NOT clearly greater knowledge, as I had completely forgotten about it. But am an accountant and we did let our house when we went abroad for a few years, and when we came back we keot it and also brought a new house and were looking at the re-mortgage thing.