Tax on rental income

[Carlat26]

Hi just wondered if someone could give me some advice.
We live in a 2 bed apartment that is mortgaged we really can't afford to sell as we no we won't get what we paid. We have a 2 year old son and we need more space and a garden, we was thinking about renting the flat out and renting a house a letting agent said we could get up to 475 a month for the flat and were looking at renting somewhere for around 550-600 a month so we will far from be making any profit, I just think its the only thing we can do to get more space but then someone has said that we will have to pay tax on the rent which means we won't be able to afford to do it, could someone give me some advice on it, and how much tax it would be?
Thanks

Yes your rent is income, taxed at whatever rate you are paying at the top of your income 20%.
You only pay tax on the profit so you can deduct any expenses - such as costs of using a letting agent or having landlord gas safety inspection.

Tax rules always change so you need to check with an expert but last time i knew -
if you bought the house as a buy to let and never lived in it you could deduct all the mortgage interest as part of you expenses.
But if you lived in it them moved out you could not deduct any of the mortgage as an expense. This rule is most important for you and I could be wrong so check with an experienced accountant
or check with the HMRC directly - they are very helpful and their advice is free.

of course you have to pay tax on the rent. You also need property insurance, agents fees, legal insurance etc etc. These things are tax deductable. Oh, and you'll need to move to a buy-to-let mortgage which may cost more.

you add up all your income, (Rental and salary), deduct the allowable items and pay tax as normal on the total.

sounds a non-starter, but make enquiries.

Mortgage interest is all deductible regardless of whether you lived in it or not. The situation mrst is referring to is when a larger mortgage is taken out than initially to release further equity. Only the into relating to the original mort is deductible.

Agree with *hinkyhonk" it doesn't matter if you have lived in the property or not mortgage interest is tax deductible.
You will need to covert to a Buy to Let mortgage (you could drop down to interest only to make it slightly cheaper) you will need 25% equity in the property to get the best deals. The rent will need to be 125% of the mortgage payment to allow for expenses. All other expenses are tax deductible (insurance, agents fee's, gas checks, maintenance). You will pay tax on any profit you make, it is quite likely you will make no profit, in which case no tax. We have a couple of Buy to lets we make profit on and a couple that break even, due to location and how the market has been hit.
You are obviously doing this as a stop gap until you can make some money to be able to move up the ladder, rather than stepping off, which is a good idea. I did this in the early 90's and it worked well.
Do you want to make a profit or would you be happy to break even at the end of the year ?

hinkyhonk - do you have a link to confirm your second statement at all? I'm planning on doing a let-to-buy and increasing the mortgage to move to another place.

Thanks Hinkyhonk - your correction to my info sounds right but as I said it was quite a few years ago this affected me and I knew the rules.
This link may help: www.gov.uk/renting-out-a-property/paying-tax

and don't be scared of phoning HMRC

There are notes on taxation on property income on the HMRC website (land and property section of tax return bit). I have always found these largely self explanatory.
As others have said you will need to change to a BTL mortgage and insurance. You should also not under estimate the hassle factor yes largely it will be relatively straight forward, but when a problem occurs they will expect it fixed now.

to reiterate, do make sure you have cover against shysters. Most tenants, like most landlords, are good honest people.

But there are some who play games. Once a tenant is in your house it takes months to get them out legally, and if they have decided not to pay rent you are stuffed unless you have rent guarantee insurance. Some people do this to get evicted as they think that will get them a council flat.

You most certainly do not have o move to a buy to let mortgage! Most lenders will happily issue you with a Permission to let certificate for a bout £60.

Meddlinkids this is an option however I know two colleagues who have tried this in the last month and it has been declined. Both lenders have wanted to change the interest rate.

If you use an agent fees can be anything from 5-15% pcm depending on the level of management you choose. Assuming you and dp/h are already using your tax free allowance on wage or savings you could pay 20% (or more if in a higher rate band) on the net rental income ie. what you charge less agent fees, allowable expenses(such as maintenance and insurances) and mortgage interest. However if you, for example , had no income or relatively low income, this net amount could be split 50:50 (if that is how property is owned) and your share may be tax free if your total personal income is less than £8,105 or you would pay 20% only on the amount above this. You'd both need to register for Self Assessment with HMRC and complete tax returns.

This will only work for you if you have a lot of equity in the property, which it doesn't sound like you do. A btl mortgage can only be 75% LTV maximum - i.e. if your house is valued by the mortgage company at £100k, you can only borrow £75k.

So... If you have NO mortgage on a house, you can borrow 75% and release £75k on a house valued at £100. If your current mortgage is 65% of the house value, you can convert to btl and increase to 75%, releasing £10k. If your current mortgage is 75% or over, you will not get a btl mortgage.

There are a very few 'let to buy' products that will let you borrow a bit more, but they are expensive.

Any btl/ltb mortgage will have a large fee - £2.5-3k, or more. And all of them have the '125% rent rule' - I.e. the valuer must agree you will be able to get enough rent each month to cover 125% of the mortgage payments.

Effectively, the '125% rent rule' means you either pay tax on the 25% over the mortgage cost, OR you spend some of that on agent fees, repairs, ect., and only pay tax on what you haven't spent on expenses.

I know several people who had normal residential mortgages who then let properties and did not have to switch to buy to let mortgages. This is not forgone conclusion. Explain this is short term change.

It depends on circumstances I think. If it is only a temporary situation (for instance to work in another area for a year or two) you should be able to get 'consent to let' on your current mortgage rather than a btl. However, lenders have had their fingers burned, and it's far harder, and there are fewer products, than there were a few years ago. And the trouble is that btl often have high application fees, not just arrangement fees, so unless you know you will qualify, it can turn out to be an expensive mistake to apply and get turned down.