Advice on Tax

[Andy]

Hello.

I'm desparately looking for some help on the tax issues of fully letting my home. I'm new to the world of being a Landlord so I am sure that the question has been asked a number of times before. Apologies if my question seems silly.

So here goes. I am aware that income from rent is a taxable benefit and that you can offset (as much as possible!) against this before the taxman takes his cut. I am aware that this can be things like the Letting Agent's fees, House insurance policies, a standard(?) 10 percent wear and tear etc. I've also read that you can include Mortgage interest (is this ONLY the interest added back onto the Loan?).

In terms of taxation, I'm not sure how I inform the taxman - is it on the standard self assesment forms? What percentage does he use? If my employment income means that I pay 40 percent tax does this mean that I will pay 40 percent tax on rental income?

My fundamental issue is that this doesn't seem to even pay for the mortgage!!Working on a really simple example. Rental income is 500 pounds a month. My mortgage is 350 pounds a month. When I take off the Agent's fee and wear and tear etc (as above) it leaves me with a figure. Taking 40 percent (or even 22 per cent) for the taxman provides less than the 350 for the mortgage. Is this normal or am I missing something really fundamental here? Surely, Landlords do not let their properties to make a loss do they?

Any help would be very much appreciated.

Andy.

[hughlss]

You mentioned tax relief on the mortgage interest but didn't appear to take it into account in your calculation. How much is the interest? £200- 250 pounds a month, then you should deduct that from the income figure along with any other expenses. You're correct in the 10% for wear and tear, but also add to your expenses, repairs - always put down something even if there are no repairs - just don't go mad!! The IR won't come to check! Then there's accountancy, water rates council tax, service charges, book-keeping, stationery, and not forgetting good old 'sundries' . There's no need to pay much tax - it's when you want to sell up in years to come that the problems might arise. For that think well ahead - joint names, using a company, 'occupy' the property yourself for a time - can all help to reduce tax liabilities.

And probably the best tip of all is 'Don't vote labour in the coming elections' the tax burden is guaranteed to rise.

Hugh

[DougQuaid]

Forgive my ignorance, just trying to get to grips with this!

Is it the case that you are taxed on the amount you make after deductions (Revenue deducatable expenses, mortgage etc)?

Or

Do you just get taxed on the amount you charge your tenent regardless?

[plym77]

Hi all

You may or may not be aware, but I am a Chartered Tax Adviser and specialise in property taxation.

Hughlss is correct in most of his information, but I have to say absolutely under no circumstances include expenses that do not exist!! Yes, it is unlikely that HM Revenue and Customs will enquire in to your tax return but if they do, the inclusion of costs that do not exist is fraud and is a very serious offense. All I am saying is, claim as much as is legally allowable, but do not commit fraud. If you are caught out, not only will you have to pay the tax back, but interest and penalties. Fraud can in extreme cases lead to imprisonment. I apologise if this seems a little over the top, but it just isn't worth scamming a few pounds off the top.

Also, companies are generally a bad idea to hold properties for a number of reasons, not least that they are not entitled to Taper Relief. There are ways to use a company to advantage, but generally speaking this is only advantageous if you have a number of properties - in this case it can prove very appealing. But the scheme involving companies would not mean putting the properties into the company itself, but would be a vehicle with which to plan.

There are other reliefs that may be avaiable, and also, planning using a partner, child, or Trust can also prove beneficial. This is more for Capital Taxes (CGT/IHT) but some of which can prove useful year on year via income tax.

Also note that to claim Wear and Tear Allowance that the property must be furnished. And the 10% deduction is calculated as: Total Rental Income, less Council Tax and Water Rates = x @ 10% = deduction.

Also note that if you claim Wear and Tear allowance, you are doing this in place of 'the replacements basis' - ie. when you replace say a washing machine, you could claim the replacement cost (if not claiming W & T) but not the original purchase.

With regards to repairs - do claim these, but ensure that you do not claim for 'improvements' which will be taken into account if you sell the property.

There are various expenses that can be claimed, and many of these are listed on HMRC website - see link:

http://www.hmrc.gov.uk/manuals/pimmanual/index.htm

I would write them down, but this list is endless - providing you have genuinely spent it!

Once you have deducted all of the allowable expenses, if you are left with a profit, it is this that is taxed at your marginal rate - so for example, someone with low income may have a basic rate of tax - 22%, and higher earners will pay at 40%.

As far as alerting HMRC to the fact that you need to prepare a tax return, you must inform them by 6 October following the end of the tax year (ends 5 April each year) in which you started your letting business, so for example, if you started letting pre 5/4/07, then you should inform them by 6/10/07, and your tax return (reporting all of your income - not just your rental profits) will be due by 31/1/08.

Andy, should you need some specific advice either in connection with tax return preparation and claiming expenses/reliefs etc, or a more extensive review, please do feel free to email me for a competative quote: sherena.glanton@horwath.co.uk. I have been able to assist a number of users of this website to ensure that they are in the best possible tax position and may be able to help you too, if this is of interest to you.

In the meantime, I hope this has proven useful.

Kind regards

Sherena Glanton CTA

[Matthew]

Hi Sherena,

What about mortgage set up fees and solicitors charges for buying the property, also stamp duty, are these all deductable?

Also one-off charges/fees for additional borrowing on properties?

I have a feeling not, but I can't remember what my conclusion was when I investigated it.

[plym77]

Hi Matthew

Ongoing fees, so admin fees for re-mortgages etc are deductible against your rental profits, however, costs incurred in connection with the purchase, so for example, stamp duty, legal fees etc cannot be deducted from your rental income, but are instead taken into account on the sale of the property.

Regards

Sherena

[pugsy]

What you need is a landlords property tax manager, software that basically does it all for you. You input all the details, it works out whats deductable and where and how much. Also Carl Bayley's book How to avoid property tax is a godsend to a newbie landlord. You can also trawl through the forum on taxationweb.co.uk for advice.