Tax on rental income

[Howcoldmytoes]

I know this has been covered before, but I’m not sure if the old threads are up to date.

My husband has a new job and pays top rate income tax. I’m not working at the moment and don’t know when I’ll go back. Our home is heavily mortgaged in both our names.

We’re wondering about moving nearer the new job, (and all three schools) but are wondering if tax will be a big issue if we rent our house out to rent another property. Let’s say we’d rent ours out for 3kish and pay 2kish. The aim is not only to make life a bit easier by being nearer work and two of the schools, but also to save some cash.

Would the tax implications make it pointless?

Thank you wise ones!

curious

You pay tax on the "profits" of renting out your old house. You get no tax relief on the cost of renting your new house. You need to do the numbers to see how it works out - you can't generalise because it depends on the rents paid/received, your mortgage interest, other allowable costs of your old property (insurance and repairs etc).

You pay tax on the profit - what you pay in rent on another property is neither here nor there.
From a tax point of view the rental income should be paid to you leaving you liable for the tax - but you can use your personal allowance of £11850 and any profit over and above we would be taxed at 20%.

Eg if it’s rented out at £3k per month - £1k expenses - mortgage, insurances etc
£2,000 x 12 = £24,000
Less your personal allowance £(11,850)
= £12,150
20% = £2,430
Leaves you with profit of -£21570 or £1797.50 per month towards new home rent.

Note that is just an example - based on projected outgoings - you can work out what actual expenses you will have.

If the rental income was to go into your husbands income it would be taxed after his salary so no personal allowance left and all would be taxed at 40% if he is s higher rate tax payer - if the profit was to lift his income above 100,000 it would impact his personal allowance and if there was any income above £150,000 it would be taxed at 45%

If the rented property is owned in joint names then the taxman will assume both of you receive income so you will both be taxed at your marginal rates even if the actual money only goes to you. That’s why our rental properties are in my name only as I don’t earn anything other than rent. The properties are mortgaged jointly but only owned by me, DH had to get independent legal advice in the risk of being liable for the debt on a property he doesn’t in fact own

We relocated and rented out our old house. As PP have said, there are some allowable deductions and the remaining profit was split between us 50 per cent each. As a SAHM I wasn't taxed on my half, DH was on his. We did a tax return online (in fact I think I used to get a refund on tax paid on interest from savings while DH always got a bill!).

I would consider the expenses involved as well though, insurance, maintenance as well as the tax.

If you put the house in your name you can use your tax allowance.

Yes jointly owned assumes 50/50 split, but you can make an election to change that.

You pay tax on the profits. The whole mortgage cost does not count as an expense, only the interest part.

The rules changed a couple of years ago to restrict higher rate tax relief on mortgage interest and are in a transition period now. You would be wise to seek professional advice.

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

Is a good start for you before professional advice. Please don’t take full notice on everything on here, some of the advice is wrong (I am a tax accountant). You have no idea who knows what they are talking about and who doesn’t.

There is also the likelihood on having to pay capital gains tax when you sell. The Principle private residence (PPR) which means we don’t useually pay CGT on our main family home is restricted once you move out. There are other reliefs available such as letting relief but only in certain circumstances and under certain conditions.

The period in which you get PPR while not living in the house is also getting shorter.

the rules changed in 2017- you need to look at the higher rate tax implications

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

Lots of inaccurate info on here. See an accountant.

The comments re paying tax on profit are incorrect. The tax rules have changed on rental income so you now pay tax on revenue not profit. If you are heavily mortgaged it’s very likely that renting out your house would end up costing you money rather than making money.
In the old days you could offset mortgage interest but that has been phased out.
As an example say you are paying 40% tax, mortgage is £1000 and you can get £1500 pcm rent, your costs per month would actually be £1000 mortgage + £600 tax, so a £100 a month loss. Obviously this is a very basic example as in real life you can offset costs like insurance and fees etc but this will hopefully show that it’s not the great money making scheme it once was.
You really need to get professional advice based on your real life numbers. This government have deliberately made it very difficult to make a profit from renting out property.

Actually I take back what I said about tax on revenue. I worded that badly. It is a tax on profit but what can be counted as a cost has been so restricted (ie you can no longer count mortgage interest as a cost) means that in reality it’s a tax on revenue...

MynameisXYZ
^The comments re paying tax on profit are incorrect. The tax rules have changed on rental income so you now pay tax on revenue not profit. If you are heavily mortgaged it’s very likely that renting out your house would end up costing you money rather than making money.
In the old days you could offset mortgage interest but that has been phased out^

Rubbish!!

You pay tax on profits. What counts as taxable profits is defined by HMRC.

Mortgage interest is still taken into account, what is being restricted is the tax relief at higher rate tax 40/45% for it. At the moment it is a transition period so eventually all mortgage interest will only be relived at basic rate tax (20%). Mortgage interest will always be taken into account though. It is just in a different part of the tax computation now. Any professional knows this.

OP, this is why you need to look at the gov advice I linked to earlier and take professional advice as necessary.

The numerical example given above is incorrect as well.

mynameisXYZ I agree with the sentiment that it’s not a great money making scheme especially if highly leveraged. We are in it for capital growth with a bit of income on the side if that makes sense.

My friends got a few btl’s, he’s a higher rate tax payer so he’s set up a limited company (cost £12 I think) and purchased with that. Only 20% tax payable as opposed to 40%.
It’s worth seeing an accountant though.

Yes a limited company is an idea but there is also an extra potential tax with residential property owned by a limited company. It is called the “annual tax on enveloped dwellings”.

Of course you also pay tax on getting dividends out of a limited company.

It is a lot more complicated than it initially sounds, which is why individual professional advice is always advised.

This is how us accountants earn our money!

So much garbage advice on this thread. I won't add to the confusion OP but I'm a chartered tax adviser if you want to message me.

Aside from the tax issues there is also the costs paying the agent for finding a tenant and the admin involved, plus the ongoing fees even if you don't have a full managed service. Then the additional wear and tear on your house. And the cost of an accountant.

Thanks all - incredibly complicated, as expected! I’ll have another look at that link. It just won’t fly if it’s going to cost us money. Just very annoying if HMRC don’t differentiate between BTL landlords with multiple properties and those that only have one home. Bloody taxman!

Have been doing some reading, but just to clarify...
Can we no longer deduct mortgage interest from rental income to reduce tax liability?
And...
if we can, can all of that be deducted from my husband’s tax return rather than mine? As mine’ be liable to 20%, his 45%

Thanks - too bamboozled by this. The rules change too often!

You can’t weight the income and tax without using a trust. It’s 50/50