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Where Taxpayers and Advisers Meet

Letting out a property whilst renting elsewhere

jessicamelody
Posts:2
Joined:Wed Aug 06, 2008 3:09 pm

Postby jessicamelody » Mon Mar 29, 2004 2:47 am

I own a property in London which I don't particularly want to sell at the moment, but need to move out of the city. I'm looking at renting out the property, and renting somewhere else to live in. To what extent am I liable for income tax on the rent paid to me on the property I own? Can this be offset against what I pay on the mortgage? The two amounts are likely to be very similar - hence the question, as if I have to pay tax on the whole rent received, I will most likely end up making a loss on the property.

Nigel Lord
Posts:518
Joined:Wed Aug 06, 2008 2:18 pm

Postby Nigel Lord » Mon Mar 29, 2004 3:07 am

Jessica

You will be liable to pay UK income tax on the net rental profit. Against this you are able to set allowable expenses including:

10% Wear & tear allowance of let furnished or renawal expenditure or capital allowances

Commissions/management charges

Repairs and maintenance

Mortgage interest (but not refinancing costs or the capital repayments)

Management/rent collection costs

Insurance

You should also be aware that in the long term you may have a Capital Gains Tax (CGT) liability on the sale of the property (the last 36 months of ownership should be covered by PPR Relief)

If you require bespoke advice or assistance in preparing lettings accounts or making returns, please do not hesitate to contact me.

Nigel Lord
Lord Associates
Taxation & Business Consultants
Caxton House
Old Station Road
Loughton
Essex, IG10 4PE
020 8418 9101 & 07769 931852
mail@lordassociates.co.uk

judy
Posts:20
Joined:Wed Aug 06, 2008 3:09 pm

Postby judy » Mon Mar 29, 2004 4:01 am

Hope you don't mind me joining in with a couple more questions on this particular topic -

Can the existing mortgage interest be set against the profits even if the mortgage was taken out some years ago, initially with no intention for the property to be let?

Also, in circumstances such as this, if the owner at some stage in the future to move back into the property which has been let and resume residence there, would it eventually become free of CGT liability?

Nigel Lord
Posts:518
Joined:Wed Aug 06, 2008 2:18 pm

Postby Nigel Lord » Mon Mar 29, 2004 4:20 am

The more the merrier.

If the mortgage was taken out for the purchase or improvement of the property, relief would be available in respect of interest arising during the let period (or void periods if let subsequently). If the mortgage is replaced by refinancing, the interest in respect of the new loan would be allowable (but restricted to the interest arising in respect of the size of the orginal loan if additional borrowings were taken for non-qualifying purposes).

If a property is lived in as a main residence, then let, then lived in again, and finally sold; any capital gain would be computed as follows:

Proceeds (net of sale costs)

Less:

The purchase cost

Costs of acquisition (legal and search fees, survey fees, stamp duty etc.)

Indexation allowance (if bought prior to 31 March 1998)

Improvement expenditure

Indexation on improvements (if undertaken prior to 31 March 1998)

Principal Private Residence Relief (PPR)

Residential Lettings Relief (RLR)

Capital losses arising in the same tax year

Taper relief (from 1 April 1998)

Unused annual exemption(s)

Losses brought forward

PPR Relief arises on a monthly basis in respect of the period of residence, periods of permitted absence and the last 36 months of ownership. The gain is apportioned between qualifying months and non-qualifying months over the period of ownership.

RLR arises where a propoerty is a main residence and the let and is the lesser of £40,000 or allowable PPR Relief.

It can therefore be seen that where a property is lived in as a main residence, and the let, there are a substantial number of reliefs and allowances available so that it is quite possible that the whole gain would be extinguished.

Please refer to me if you need bespoke illustrations.

Nigel Lord
Lord Associates
Taxation & Business Consultants
Caxton House
Old Station Road
Loughton
Essex, IG10 4PE
020 8418 9101 & 07769 931852
mail@lordassociates.co.uk

jessicamelody
Posts:2
Joined:Wed Aug 06, 2008 3:09 pm

Postby jessicamelody » Mon Mar 29, 2004 4:58 am

Looks like we would indeed be liable for income tax on at least part of the rent then, although hopefully some of the reliefs available would help us out. Thanks for the advice, Nigel! Is it absolutely vital to get an accountant to help us with tax returns etc., do you think, or is this something that's possible for someone with a reasonable grasp of figures to do themselves?

Nigel Lord
Posts:518
Joined:Wed Aug 06, 2008 2:18 pm

Postby Nigel Lord » Mon Mar 29, 2004 5:09 am

Jessica

It is your call. Before making a decision you may wish to look at the Inland Revenue website and download the appropriate section of the Tax Return and notes from last year (see links):

http://www.inlandrevenue.gov.uk/pdfs/20 ... /sa105.pdf

http://www.inlandrevenue.gov.uk/pdfs/20 ... _notes.pdf

The usual fee for one return plus supporting accounts would be around £225 plus VAT, and would be tax deductible.

Please let me know if you need further help.

Nigel Lord

ChrisMc
Posts:1
Joined:Wed Aug 06, 2008 3:09 pm

Postby ChrisMc » Mon Mar 29, 2004 8:55 am

Hi Nigel,

I'm just trying to work out the implication of not being able to offset capital repayment element against tax...on a standard 20 year mortgage what % roughly of the total monthly mortgage payment is the capital repayment element?

Nigel Lord
Posts:518
Joined:Wed Aug 06, 2008 2:18 pm

Postby Nigel Lord » Tue Mar 30, 2004 3:46 am

Chris

If you look at your mortgage statements you will see that interest is stated as a separate item (either monthly or annually). If you have a fixed mortgage this will stay the same. If you have a variable mortgage the interest will increase/decrease in line with your lender's rates.

Nigel Lord


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