Rental Income and Tax

[Thunderwing]

I'm looking for some advice - DH and I have become accidental landlords and we are trying to wade our way through all our obligations.

I understand we need to complete a tax return now but I'd appreciate some clarification. Firstly the details (not exact figures and trying to remain vague for privacy reasons)

• We still have 10 years + outstanding mortgage - our repayments are around £300 per month.

• We will get just over £4000 a year in rent.

• We are paying the factoring costs of approx £300pa

• My DH pays 40% tax, I pay 20% (we are in scotland)

When we add up the mortgage repayment and the factoring costs we are actually going to be left with no profit at all from the rent each month. It was never our intention to make money from it, we are just struggling to pay both the rent on our new property and a mortgage at the same time.

So my question is; how much tax are we likely to have to pay on the rent? How out of pocket are we still going to be??

TIA

You cannot offset the mortgage repayment for tax purposes. You used to be able to offset interest element think that changed recently. You can offset maintenance costs, insurance and related expenses. Depending how the property is owned will depend how the income is allocated.

You cannot offset the mortgage repayment for tax purposes. You used to be able to offset interest element but think that changed recently. You can offset maintenance costs, insurance and related expenses though. Depending how the property is owned will depend how the income is allocated.

There are some allowable expenses, not sure what factoring is but assuming that is the agents fee that should be allowable along with gas certificates, etc. Does Scotland give any relief for mortgage payments, you'd have to check that.

If the house is owned 50/50, you get half the profit each so your DH's half will be taxed at 40% and your half at 20%.

I don't know what factoring is either but if Scotland is the same as England you need to keep a record of all costs of repairs, letting agents costs if there are any together with the income you get

Thank you for the responses.

Factoring covers the buildings insurance. We are not paying an agent, and we have paid for all the safety certification etc ourselves.

When you say we get half the profit each, I take it you mean the rent that does not cover mortgage interest (despite the fact that it's not 'profit' as we are not coming out of this any better off).

My Dh has suggested moving the mortgage into my name only so that we are only taxed at 20% and I promise not to sell the house and run off into the sunset with all the money

taxed on half the profit each

Afaik the interest you pay on the mortgage isn't included, you will be taxed on the rent minus the allowable costs (my dbro rents out properties and this is what he has to do)

The "profit" is rent net of allowable expenses, not mortgage.

Have you told your mortgage company you're now letting it out? In most cases you would need to convert your residential mortgage to a buy to let one.

You only pay tax on the profit, at your usual tax rate.

It wouldn't be the mortgage that needs moving, it would be the ownership of the house. I'm afraid you need someone that knows specifically about Scottish law and tax, and English tax regime is different from Scotland now.
Do you have land registry like in England?

Speak to an accountant. The rules re tax on the interest part of the mortgage have changed recently and it’s quite complex (it’s on a sliding scale and you also get a rebate so not straight forward!). You have to pay tax on all profit for the repayment part. Depending on when you started renting, tax returns for years 17/18 are due tomorrow.

www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-case-studies

Thanks again for the help - yes we've changed the mortgage - I've been diligently working my way through my checklist of things to do!

One final question - when would I need to complete the first tax return? The tenants aren't moving in until next month and as far as I understand it the deadline for online tax returns is tomorrow. I am preparing a folder to keep a record of all my payments/receipts etc in connection to the rent; is there anything else I need to do?

Crosspost Bigsighall - so I won't have to submit the first tax return until Jan 2020?

If the tenants move in before April 6th 2019 you will need to submit a tax return for 2018-19 - on paper by end of October, online end of January 2020.

Thanks so much Lizs

I think I will try and get an accountant to look over it all for me too before then.

Appreciate the swift and succint responses

You will need to complete a tax return for the tax year 6 April 2018 - 5 April 2019. So the deadline will be this time next year.

Profit is all of the income less allowable expenses. What you do with the leftovers (pay the mortgage, refit the boiler, go on holiday) is up to you but it is still taxable. You are making a profit but you are using it in this instance to pay the mortgage.

Sorry cross post, slow typing!

Moving the mortgage into your name doesn't help you. You need to transfer the house and the mortgage to you. Howevr you can elect for you to have 90% of the profit and DH has 10% assuming England and Scotland are the same.
You can offset the cost of the certificates and servicing, insurances, any maintenance. If you need to pay service charges on leasehold properties they are allowable.
It is a little late if you are doing a return for 2017-8 as it needs to be in tomorrow at least in England.
It sounds as if you could do with some advice. I think HMRC website is helpful but you may pay a premium for an accountant this late in the day. Have you got all the receipts for things you have purchased.

Sorry cross posted slow typing

You won't need to do a tax return until next year as you have not let it yet. I would suggest you get a good accountant as there are various reliefs. My tax return cost me £180 inc vat and was worth every penny. The tax forms are very straightforward - a child could fill one in, but the knowledge behind the allowances is what you pay for. Also speak to them before you set it up for letting as there may be a better way to do it.

With your mortgage, the capital part, as others have said, cannot be offset.

You can see offset a part of the interest portion of the mortgage (if you have a repayment mortgage your mortgage statement will show how much the interest part is each month), but that is decreasing each year as they are phasing it out.

Rather than change the whole mortgage, you can change how you own the property, so you have a bigger share than your DH. The default if you are married is 50/50 (so you have to each file a claim for income of half the rent less your half of the deductions).

You can sign a trust deed to change so say you have 95% and DH has 5%. You would each claim income, but only for your percentages but you would not have to re-mortgage (unless you intend to anyway to convert to buy to let). The only thing is that as well as signing a trust deed to say your new shares, you have to send a copy to HMRC and register the new shares with them or it doesn't count (I think it is Form 17 or something like that).

Yes I have all the relevant receipts etc - but as the tenants aren't moving in for a couple of weeks yet we are not yet officially landlords.

I will speak to an accountant and hopefully they will be able to keep me right.

It's such a pain in the rear though - I never wanted to be a landlord - but the housing market around here has never recovered since the crash and we find ourselves with an unsellable millstone around our necks. Luckily the renter's market is much healthier and we are not short of tenants!

That's useful information Cornish, thanks - I will look into that

There's still some tax relief available on mortgages but as @CornishMaid1 said this is on a sliding scale and being phased out. Speak to an accountant!

Have you completed your landlord registration with the appropriate council?