Dazzler

I'm looking to rent my house and live with my girlfriend for a period of time (to see if we can stand each other under the same roof!!).

What tax are you liable for when doing this ? I've been told that you're only taxed on what ever profit you make over the mortgage cost per month, e.g., if you pay £850 and you rent for £900, you'll only be taxed on that extra £50. Others have said that you are taxed on the interest part of the mortgage, not the capital repayment part. That'll obviously mean I'll be taxed on a lot more.

Anyone know exactly what happens ? Any advise on this would be much appreciated.

Cheers

AvalancheS8

Other way round if I remember right, the notes I have from sorting out the tax on my wifes old flat that is now rented out say that the tax deductable costs are:

Insurance
Maintainance - but not improvements
Agents fees (if any)
Wear an tear (10% of annual rent)
Mortgage interest
Any bills you cover for the tenants (council tax etc)

So you'll pay tax on what's left after that which will most likely just be your mortgage repaymants and the profit.

Best bet is just to phone the inland revenue and go through it all to check, they are very helpful.

imlach

Just to confirm....yes, the interest part of your mortgage is tax-deductable, the repayment part is not tax-deductable.

MartinM

So turn the mortgage into interest-only and you can deduct the whole mortgage payment

You need to tell (better safe than sorry if something happens) the Bank/BS that the mortgage is now covering a rental property - that may cause a problem unfortunately:
- rates are usually higher for rental mortgages (thieves!)
- some mortgages are explicitly not valid for rental properties
- they may insist that the rental payments are at least 1.3x (or some other number) the mortgage payments...measuring your ability to pay.

I'd call the bank/BS and say you'd like to talk about it 'in principle'...or that you have a friend that is thinking of doing this

edit: Sorry to be a partry-pooper...
...you also need to have rental/BTL property insurance that explicitly covers the building itself, the fixtures and fittings and any furnishings you supply - but not the tenants' property - that's up to them....
...and tenancy agreements to protect you and the tenants for normal and abnormal circumstances

imlach

Err...no you can't. Taxman would pull you up on that one....
Don't believe anything you read on SN

Dazzler

Cheers for the advise chaps.

Damn, the interest only option was sounding like a winner !

MartinM

There is absolutely nothing wrong with an interest only mortgage, therefore fully tax deductible, on a rental property.

It is the standard bsuiness model for BTL/rental investments

In fact anyone not having such a mortgage for a BTL/rental property, quite frankly, does not understand the whole business

..but I'm happy to hear chapter and verse from IR150 (Taxation of Rents - A Guide to Property Income - which everyone with a BTL/rental property should download from the IR site and read - three times!) on why it's not allowed....seeing that para 183 says
<<183. Interest payable on loans used to buy land or property which is used in your rental business, or on loans to fund repairs, improvements or alterations, is deductible in computing the profits or losses of your rental business in the same way as other expenses.>>

May be you shouldn't believe everything you read on SN

gareth123

Why? I've done that. Didn't cause any problems.

You can only deduct interest (as opposed interest and principal), so if you're only paying interest...

imlach

Quite true, but you missed my point. What this man is wanting to do is to convert his property into a rental property.

WHAT YOU CANNOT DO IS INCREASE THE INTEREST ONLY PART OF THE MORTGAGE AT THAT POINT IN TIME TO AVOID TAX. The taxman will not allow tax relief on the increased portion.

MartinM

Excuse us Dazzler while we have a bit of an off-topic moment

Maybe I don't understand everything I read on SN

If I accept that you cannot increase the interest on a mortgage to avoid tax, then:
-what happens when interest rates rise? My BTL interest is more, and it's the same mortgage, so I don't get tax relief on the extra interest?
- what if Dazzler chops in his existing mortage and takes out an kosher interest-only 'rental' mortgage at a higher rate than his existing mortgage - there's no relief on the extra interest over the (now non-existent) original mortgage?
- what if Dazzler changes his existing mortage into an interest-only 'rental' mortgage at a higher rate than current...the rental 'business' that Dazzler has will have income (rent) and expenses (new mortgage interest + other things). This is a new business unconnected with the past and tax is due on 'income-expenses' - the previous interest on the 'domestic' mortgage is surely irrelevant?
-can you point me towards any IR statement that says that?

Becoming more intrigued, rather than combatorial....

imlach

I can't find any official webpage for now, but this one mentions it a bit.....

(saying that, it seems to suggest that the IR are beginning to turn a blind eye to some of it - we shall see).

http://www.faulknerproperty.co.uk/news.php

HOWEVER, the old rule still seems to apply - you can't claim tax relief on more than 80% of the original purchase price (unless it's a longer time, in which case 100%). This is to stop people remortgaging every few years to claim tax relief ad infinitum on an ever increasing mortgage.....

So in the case of the original poster, if he had bought his house 25 years ago, he'd only be able to claim tax relief on 100% of the price he paid 25 years ago (in theory) - which would not be a lot of relief!!!

imlach

PS MartinM, if you have been a landlord for decades and have been remortgaging to more than 100% of the original purchase price of the property on a continual basis every few years, I'd be phoning your tax office anonomously in the morning to clarify

Otherwise, if they catch up with you, you could have a significant amount to repay!

MartinM

I've scanned the link - it's strange that IR150 doesn't seem to talk about this at all...but ISTR something somewhere (I can't immediately find where) about when re-mortgaging to extract some capital gain (to buy an 05 STi maybe ) that the extra interest is not an allowable expense.
...not that I think this is Dazzler's case at all, since he's never had a rental business

But the link seems to indicate that the extra interest might be an allowable expense now

And no, I don't need to phone the tax office - I've one property, had it 8 months, on an 80% mortage of the original price (now only 70%), producing 6.5% simple yield (income/value) and more like 40% proper yield (income/my investment) ... but I expect I've misunderstood that too ... so re-mortgaging is not quite on the horizon - yet

imlach

Doesn't matter - if he was to remortgage to over 80% of the original purchase price he'd be best to see his accountant. This recent change (and reading elsewhere, it is not a change per se, but more of a different interpretation by the IR - others seem to think the old rule could still apply) seems to allow a remortgage that is NOT for home improvements to pass off ok....that is all.

Yes, but only up to 80% of the original purchase price.

Ah, you're a relative fresh landlord then
Yes, you don't look like you need to phone your local IR office given your figures.

I've been through all this already many times, but left it to my accountant to sort out all the figures.

imlach

So....you'll see now that my original statement as regards your original info to "not believe everything you read on SN" is probably the best advice on this thread

Dazzler

You chaps keep on going, I'm learning with every post