Rental income vs CMS

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Good morning everyone,

I am new here, not sure if this is the right place to put this post so please accept my apoologies if I have got this wrong and feel free to move it.

So, my ex and I are divorced, and have been for some time now. After our divorce, I bought my own house which is purely in my name and nothing to do with them.

I have been paying child maintaince for the past 4 years or so after my daughter went to go live with her father full time as it was her wish.

I have recently moved in with my new partner, we have been together over 5 years now, and renting out my house whilst we trial living together.

I received a notice of variation from CMS stating that they cannot find any record of me renting the house out with HMRC and can I confirm it with them for payment purposes.

My understanding was that, like tax, you only declare the profit that you earn. My research is less certain with CMS. The rental I receive is £1000 a month, however that goes straight into the mortgage which is £1050 so I am making a loss each month and topping the remaining £50 myself each month.

I am making no profit from renting the house out from the rental income.

My question is therefore this - how would CMS see this? Do they see the entire rental income as income even though it is paying straight into the mortgage and I am making a financial loss each month from the rental or is it only profit from the rental income that they would take into account?

Section24 has been abolished which means you are taxed on income not profit and you will have £1000 per month added to your tax bill you can no longer claim mortgage interest relief hence why every landlord in the country is selling up yea it’s unfair yes it’s bullshit just make sure you’ve protected the deposit belt and brace all your documents and get landlords insurance

You need to fill in a tax return on your rental income even if it turns out that you don't owe any tax.

Prepare for a tax bill plus fines.

You have to declare all taxable income. As a pomp said you don’t even get to deduct the mortgage interest before working out tax on rental properties (I assume the whole £1000 isn’t interest).

your ex has obviously reported you. You need to sort it with HMRC before you get hit with penalties

Mortgage payments for rental properties aren't deductible from your income for tax purposes... just anything you pat to maintain the property.

Thank you everyone for your responses.

I literally moved in with my partner three months ago and only received two months rent so far. Thank you for the heads up about updating the HMRC with it - I will get onto that today with them.

Tax aside which is what it is - my concern is the CMS. Will they see the entire £1000 as income and adjust the payments based off that, or is it just off the profit that I earn from that rental income?

Probably call them I doubt they will know but you could try with £12k of rental income it could push you into a higher tax bracket so it could have an effect. Alternatively you could rent a room in your house earn £7500 tax free and no tax implications especially if you don’t know whether you will enjoy living together

You're not making a loss though, are you?
Your mortgage is 1050£, but each time you pay, you are adding wealth to your name. When you sell, you will receive whatever's left after paying back your mortgage.
So now you're paying 50£ into the mortage - which is not a loss, because for each 50£ you pay, your wealth grows with 1050£ because the rest is covered by your tenant.
Your mortgage has to be paid, regardless of whether you have a tenant or not. The rent is just a surplus. That's why you have to declare it as income.

Unearned income over £2500 a year can be included as income by CMS. Your ex has obviously applied for a variation based on it.

It used to be only profit that was classed as income used for calculation, but it's been a few years now since I worked there so that may have changed.

@Girlmom35 she will be making a loss because she will be taxed on £1000 so basic rate £180 per month high rate £400 a month ball park as I said rent a room out get £7500 tax free

On the face of it shes making a loss, but if she was living in her house she would be paying the mortgage herself. I doubt she's giving her partner £1050 a month to live in his house (plus bills)

Rental income is income. It’s irrelevant that you ultimately make a loss, it’s still income for tax and it will still be income for CMS. Why should you be able to contribute to having an asset without contributing to your child?

As part of the clamp down on private landlords the interest component of a mortgage payment is no longer an allowable expense that can be deducted when working out the profit. You will get a tax credit (at 20%) on the interest paid however, to offset against the tax due, so if you are a basic rate tax payer after inclduing your renatl income there's no difference

The capital repayment element was never an allowable expense. You need to break down you £1,050 mortgage payment into capital and interest each tax year to do your tax return - the bank will provide a statement.

The CMS shoud base the payments on the profit element of the rental income, but they will base that on the gross taxable income AFAIK, which for tax purposes does not include the mortgage interest or capital repayments so, unless you have other costs (agent?) then I think the whole £1k a month will be seen as income.

Sorry but I think there’s a lot of being sidetracked about the income and tax. You’ve got far bigger things to worry about - your property assuming that it has some equity - will be classed as an asset …. the property that you rent out I mean… if your ex can prove that you have tenants in it - and let’s face it I guess at this point he can … they will go for it as an asset and you pay a huge amount per pound that it’s worth. I can’t remember the exact figures as this exact scenario happened to me 10 years ago except for I was the one chasing my ex for his asset. He ended up having to pay me an astronomical amount per week and within six months he sold the property told CMS he was going to buy a new one with it and live in it and that was the end of it for me, which was a shame because he was a total arsehole, but for that moment of a few months, I did have a gleeful smile on my face… start researching asset.

Hi Everyone, wow, thank you so much for the responses here. I really appreciate it. Just thought I would give an update :)

So I have contacted the HMRC as advised above and chatted to them about it. As far as they are concerned, because I am not making a profit in terms of having liquid capital, all I need to do is notify them and provide them with evidence that the mortgage is more than the rent I am receiving.

If that changes and the rent exceeds the mortgage amount, then at that point, I need to complete a self assessment form for them and I would be assessed on the £12k a year which would be on top of my gross salary which would definitely push me into the upper tax bracket. I am almost there anyway just through my job. You then have two options - you can either apply for a £1000 a year tax exception meaning they would only assess £11k, or the ability to claim back expenses for maintaining the property as a landlord if those expenses exceed £1000- but apparently, you cannot do both, its one of the other.

Hopefully, I understood them correctly - they said all I need to do for now is just let them know I am renting it out and provide evidence that the rent is less than my mortgage.

In terms of CMS, they are saying that, as CMS check my income through the HMRC, that the HMRC will show that I do not have any "additional income" and that should all be ok. Heres crossing fingers.

Do I have an obligation to tell CMS and provide them with the evidence or do I just leave it for them to be notified via HMRC?

Do I have an obligation to tell CMS and provide them with the evidence or do I just leave it for them to be notified via HMRC?

Always tell them yourself and keep proof that you did.

The systems should talk to each other well, but they don't always.

‘So I have contacted the HMRC as advised above and chatted to them about it. As far as they are concerned, because I am not making a profit in terms of having liquid capital, all I need to do is notify them and provide them with evidence that the mortgage is more than the rent I am receiving.
If that changes and the rent exceeds the mortgage amount, then at that point, I need to complete a self assessment form’

I’m fairly sure this is not true!

You complete self assessment regardless and are then taxed accordingly.

I agree, not true.

And I’ll third the views above. The phrase ‘not making a profit in terms of liquid capital’ is a nonsense jumble of words and not something HMRC would say. Even before the changes on interest deductibility the capital element of a mortgage payment was never deductible for tax purposes. Otherwise we would all have just shortened the term do the mortgage so that the monthly amount equalled the rent, and purchased a property tax free! The only exemption is of rental income (whole property) of less than £2,500 per year, or the rent a room scheme for which the annual allowance is £7,500

HMRC match land registry records to taxpayer records, so they’ll know that the OP has a house. It might take them a while to find out she no longer lives there, but assuming she notifies her employer or HMRC she’s moved they will find out eventually. It sounds as if the CMS have already identified a discrepancy; the local authority are likely to be next, unless the OP hasn’t updated them for council tax purposes that she’s moved either. I think not being honest with HMRC will lead to a world of pain…maybe not immediately, or even soon. But eventually. And when they catch up it will be expensive.

Exactly this. I know someone who ‘didn’t make a profit so didn’t have to fill in a tax return’ and got a letter.

Not criticising you OP, you called them and made enquiries but I do think you have been given bad advice and you don’t want to get stung a couple of years down the line.

Sorry - I don’t know anything about CMS which was your main question.

That information about mortgage payments and tax obligations is incorrect. Consult an accountant to learn how to prepare your tax return. You will have been reported unless you are Al Capone.

If the information you think you got from HMRC is true then landlords up and down the country would be getting the party poppers out!

Rent being less than a mortgage means no tax is due?

My house has been rented out for a decade. The rent received has never been as much as the mortgage and I've always had a tax bill every year.

If your mortgage is interest only and you are not a higher rate tax payer - and the total rent receipts don't make you a higher rate tax payer - you may not have tax to pay.

You will receive a 20% credit back against the tax on your mortgage interest and as a lower rate tax payer that would balance out your tax. Rental income is added to your total income without deductions for mortgage interest.

The way you inform HMRC of the amount of rent and mortgage is by completing the Land and Property pages of a self assessment tax return.

Edit: tax would be due on any capital repayment portion of your mortgage - if you don't have an interest only mortgage.

It will be classed as £1000 income, which you are not declaring. Mortgage payments for your rental don’t come off the amount, just what is spent on upkeep and repairs of the property. Each time you make a mortgage payment, you are adding to your wealth, not taking away from it.

This is categorically not true. Either you’ve misunderstood, not explained correctly or been misadvised.

The gov.uk page below says that you must do a self assessment if your income BEFORE expenses exceeds £10k, and at £1k a month it certainly does.

www.gov.uk/renting-out-a-property/paying-tax