House Rental and the Tax Penalty

[Party Animal]

Okay, so the topic is not related to military aviation in any way but a lot of pprune contributors will have had firsthand experience of this.
For the first time in my 30 years of service, Mrs PA and I have decided to rent our family home out. Pretty straightforward stuff but I have a couple of quick questions regarding how much we will need to pay the tax man at the end of the year. Being outside the UK at this moment and with no UK SP around to ask, grateful for any sensible replies.
In simple terms:
Mortgage = £1k / month
Gross rental = £1,100/ month
Net income after rental agency takes 10% = £990/ month (£11,880 per year)
Married Quarter rent = £395/ month
And I pay tax at the 40% level
Back to my questions. Will I have to pay 40% tax on the yearly net income (i.e, £4,752) or is my mortgage taken into account? If the mortgage is accountable, then would I pay any tax on the rental income with the monthly mortgage being higher than the net rental income? If the mortgage has no part to play, how about the married quarter rent? My workplace is too far away from the family home to enable any commute option and my rental agents couldn't (or wouldn't) answer any of the above.
Hopefully easy questions for those in the know and maybe I will get easy answers rather than having to wade through masses of crap on the HMG Tax Blah website or having to employ a specialist tax advisor. Just after a ball park figure for what I need to set aside.
Cheers

[Gomrath]

Pretty straightforward stuff

Actually it is not. There are a number of pitfalls.
The amount of profit made from the rental is a factor, plus you can defer some of the costs incurred in the rental.
You really do need to consult a Tax professional BEFORE you start - plus your mortgage company to let them know of your intentions. If you get a tenant who ceases to pay rent, then you are stuck and that is not the time for the building society to find out that 'their' property is suddenly occupied by a squatter.

[G-CPTN]

Make sure that your 'building society' (assuming you have a mortgage on the property) are happy with your plans (some don't allow it and you might be forced to remortgage - at a less beneficial rate) and also your insurance company (who will almost certainly require a different policy).
See also:- Record-keeping for landlords : Directgov - Money, tax and benefits (http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnPropertyAndRentalIncome/DG_10013376)

Tax on property and rental income - Tax - Which? Money (http://www.which.co.uk/money/tax/guides/tax-on-property-and-rental-income/)

Living abroad - Tax on property and rental income - Tax - Which? Money (http://www.which.co.uk/money/tax/guides/tax-on-property-and-rental-income/living-abroad/)

If you sell the property without regaining possession (ie as your primary residence for a specific period) then the profit is subject to capital gains tax.

A good letting agent should know what is required . . .

[Hobo]

G-CPTN is right, make sure that your mortgage company and your insurers are happy, you will almost certainly have to pay a higher mortgage rate, and most 'regular insurers' don't touch let properties.

You will also be liable to CGT, for the proportion of the gain attributable to the rental period, when you sell - subject to certain exceptions.

You will have to pay 40% on this unless you own it in joint names, in which case you will pay 40% on half and Mrs PA will pay at her marginal rate on half.

You don't have to make the first (lump sum) tax payment until the January following the end of the tax year that you start the let (so don't spend it all). So if you start in say, May 2012, you won't pay until Jan 2014. You then have to pay an estimated amount on account for future years.

You don't need to wade through a load of IR stuff, there are very clear leaflets they produce on all this, including what you can and can't claim for - I don't think you will be able to claim your married patch.

Having let since 1996, I wouldn't waste your money on a tax advisor. Don't listen to anything your letting agent says without checking. The contract is between you and the tenant. Filling in the annual tax forms is straightforward and well explained.

[Ancient Observer]

All the previous posters are correct about mortgage and insurance. Also check furniture type. If furnished, must be the right sort of fire resistant. If more than 2 floors, must have fire resistant self closing doors.
Inland Revenue allow a fixed deduction from rent for wear and tear. (15%?? - check). Mortgage interest is deductible, cap repayments are not.
Time for a beancounter?

[Clearedtoroll]

I am not a tax advisor but do rent my house...

You can't offset the MQ rent cost against your income as an expense.

You CAN offset the interest component of the mortgage on the rental property. So if all (or even most) of that mortgage is interest, then you are making a loss on your property and owe no tax.

You can also offset that loss against salaried income earned by you and Mrs PA (How you jointly own the house and whether Mrs PA pays income tax will probably be relevant, but my expertise on the detail runs out)

[Chinny Crewman]

Again no tax specialist however I live in MQ and let a property;
What troll says is on the numbers, for what it’s worth retain an accountant to prepare and submit self assessment forms for you and your partner. Being in the higher bracket with property definitely worth it. My accountant charges approx £200 to prepare both our returns and in addition to maximising our allowances it takes the worry out of it all. If you get the returns to the revenue before Dec for the previous tax year any tax owed is collected via PAYE providing it is below 2K which it sounds like yours will be.

[nice castle]

Also the necessary costs for a landlord that can be offset against tax include:



Cost of landlords house insurance on the rental property
Cost of gas safety check
Cost of electrical checks
Cost of replacing appliances fitted at time of rental and included in rental agreement if they go u/s
Cost of agents fees
Cost of fuel to drive to property to do 6 monthly checks/effect repairs etc
Cost of professional fees paid to maintain the house (eg plumbers, electricians etc)
Costs of maintaining the property yourself (keep B&Q receipts etc)


All this adds up. Keep all receipts and keep a book to note every expenditure. (I wish I followed my own advice on that one!)
Any ig expenditure, that leaves you in an overall loss for that year, means that you can carry that loss over to the following tax year to help further offset your tax bill.

Get familiar with self-assessment - very easy, provided you have kept a half-decent record of expenditure.

Don't forget you'll need to lodge the tenant's deposit with the DPS. Again, be organised with the email they send you detailing the release code for the tenant's deposit.

Deal with all matters with your tenant over email/in writing, rather than on the phone. Expect them to be the model tenant and very friendly at the start of the tenancy, but not so friendly when they want to move out and get their deposit back.

Trust your gut on whether you want these people in your house or not. That instinct has never failed me, and I haven't once checked a reference other than banking. (So far so good, having had about 6 different tenants across 2 properties since 2006, maybe I'm just lucky)

Be a great landlord. If you want your tenant to look after your place, you need to make them see it as their own and put roots down, then they'll want to look after the house. To get them to put roots down, allow them to paint the walls if they wish, to suit personal tastes. Ask them to return the walls to their original colour on leaving. Fix any problems pronto, and with energy = a happy tenant who likes their landlord. There are many crap landlords out there, just as there are many crap tenants. Don't be a crap landlord, and your tenants will see you as a valuable commodity and will not want to move unnecessarily, in case their next landlord isn't as good as you. This means you have less hassle (small jobs just get fixed by the tenants) and fewer void periods (that cost money in lost rental income and time in finding a new tenant, not to mention the exorbitant agents fees!)

Buy the book by Karl Bayley about avoiding property tax from the taxcafe website - essential reading and you'll cover the cost of the book tenfold.

Good luck, hope this helps.:ok:

[WorkingHard]

You cannot set any business losses against your PAYE earnings but are able to carry them forward year on year until you are making profits from the same or similar business (which is what letting is in reality), until you have earned sufficient profits to cover the losses then tax becomes payable. Ensure you keep proper and comprehensive records and submit your accounts annualy with your tax return. As said above unless the property is in joint ownership (i.e "tenants in common") then you cannot "share" the profits or losses.
Hope this helps.

[VinRouge]

If your misus doesnt work, get her to open up a bank account and have the rent paid into that account. Run all in her name. After annual costs, its unlikely you will have to pay the tax man a penny or at least halve any liability to the tax man.

[racedo]

If you sell within 3 years of moving out there will be no CGT to pay (normally) but again ensure you check as tax law changes at the whim of idiot governments..

Also worthwhile getting the property fully valued before renting out as if you bought it 20 years ago the value may have gone up but provided it is a legitimate valuation then HMRC are more likely to accept it.

Interest on mortgage is allowable but again if you have low mortgage then remortgaging before moving out and taking equity out is allowable providing done before 1st let out.

There is a 10% allowance for wear and tear with fully furnished but avoid FF like the plague as little premium in rental and tenants will thrash Furniture.

Get Gas / Elec fully checked and sorted before tenants move in and take every single electrical item other than built in items out as you responsible for PAC checks every year on things like Kettles / TV etc etc

[Stuff]

For those looking for the book recommended by Nice Castle, the author is Carl Bayley (with a C) ISBN-10: 1907302433 ISBN-13: 978-1907302435

Copy on order for the princely sum of £24 from Amazon (other booksellers are available!)

Since Mrs Stuff and I have 2 properties rented out I reckon even one minor tip will pay for the cost of the book. For the truly cynical amongst you, no, I have no relationship with Mr Bayley.

[Mystic Greg]

Lots of good advice above. In addition to Nice Castle's list of offsets, there is also Wear & Tear allowance (10 per cent of the rent, less any Council Tax and Water Rates you have paid) to compensate for minor damage to moveable furniture.

[dagenham]

It also depends on where you are being posted

If it is in the usa or other western countries you will be taxed on your global income in that country, this will include any uk income.

The reality will probably be ok as in the us the tax is far lower for paye.....but you get stuffed on the council tax, if you are off base.

Best advice is to speak to a proper bean counter even if you are staying in the uk. it will cost you a couple of quid but well worth it. As you will also get into issues of primary residence and capital gains if you decide to sell it without moving back in or do not move back in for a couple of tax cycles. The fact that your rental income hits the tax system forewarns mr hmrc of this......

Do not under estimate this last bit....with by to let hmrc is eagle eyed about all the capital gains lost due to people claiming rentals as principle residence on sale. More than a few have bee caught out by hmrc then demanding cap gains after the sale has gone throught. A hats off interview with mr hmrc only goes one way

[timex]

I'd only suggest that you make sure the agent looking after your house is capable, ours was rubbish. They never checked the tenant every 2 months, and thought the house was fine after she moved out. It took my wife and I the best part of a fortnight to totally redecorate the house and clean the carpets!!

[Whenurhappy]

I'm still serving (just!) and we have rented out several houses - both as assured tenancies ('long lets') and the potentially lucrative holiday let market. I concur with all the advice above and don't be afraid to speak with HMRC - as I have pointed out in earlier threads, they are helpful and will give you a degree of benefit of the doubt provided you don't take the p!ss.

If this is your only property, make sure you write to the tax office and have it declared as your principle private residence on the basis that you would be living in it, subject to the exingencies of the Service - and keep a copy of the reply somewhere very safe! If you have 2 or more properties, you can re-declare which is your principle private residence before selling it, therefore avoiding CGT (just as MPs did - lawfully, albeit a little bit shady).

Based on the indicative figures you quote, your tax liability is likely to be small, especially if your spouse doesn't work, or has a relatively low income. Don't be tempted to avoid declaring the income - you will be found out, and contrary to what many believe, there is no 'statute of limitations' - as, again, I pointed out in earlier and related threads, HMRC came after us about a property we had in the mid 1990s. We had played by the rules and I got a buttock-clenching, gritted teeth appology from them.

final top tip: If you have ever been treasurer of a stantion fund and learned double entry book-keeping, keep track of income and expenditure in that manner; although I log all my transactions on a spread sheet, I still maintain a ledger in ink and it impressed the hell out of the auditors when HMRC selected us for closer attention.

PS: Of course, you should ignore any advice on this thread as few of us - if any - are qualified IFAs.

PPS: Ditto advice (qv) about the property managers. If possible arrange for occasional visits by yourselves - we sacked our PM from Wootton Bassett - they were charging us for quarterly inspections that weren't taking place and were happy for tenants to put a chest freezer on new carpet in the living room, paying back the bond even before the final inspection.

[Flap 5]

This is certainly not straightforward and gets very technical. You will need a tax accountant or better knowledge than you appear to have.

One thing that has not been mentioned is that you appear to have subtracted your mortgage payments to get your net profit. That is not correct. You can only set your mortgage interest against your tax liability.

[Whenurhappy]

In defence of the OP, anyone with a modicum of common sense and otherwise straightforward financial affairs can easily manage the letting of a property and the subsequent Tax self-assessment. There is software available and HMRC publish a wide range of guides, including ones specifically for SP. But of course, fees expended with a professional advisor are deductable from your income for tax purposes!

[The Old Fat One]

This is certainly not straightforward and gets very technical. You will need a tax accountant or better knowledge than you appear to have.



I have 4 properties rented for 8 years, and I have got by without a tax advisor. Direct Gov (link has already been posted) has a comprehensive guide on what you can claim as an allowance, so if you can read you'll be fine.


Be a great landlord.


Great advice....heed well.:ok:


PS: Of course, you should ignore any advice on this thread as few of us - if any - are qualified IFAs.



This has come up before....anybody can advise anybody so long as they are not charging fees. There are many good IFA's out there...and many useless, greedy ****ers as well. When it comes to IFAs ...caveat emptor.


I'd only suggest that you make sure the agent looking after your house is capable, ours was rubbish.


Again excellent advice. I would advise against self-managing..it is usually a false economy. A good agent will keep you house filled, the rent paid and get you the best tenants. Look for well-established businesses, national franchises (they will have best-practice code) and don't be afraid to seek references from the agent's customers. Currently the rental market is hot, so rental agents are competing for properties. Don't except the first quote, but don't batter them too hard to lower their fees; you want a good relationship with them over a long time period. When you find a good one...STAY PUT! Forgive them a minor error or two and you will build a stable relationship.

Finally for everyone renting properties, heed the words of Warren Buffet..

Do not invest in something for 10 weeks, unless you hare prepared to hold it for ten years.

If you are looking to make serious money in the property game...you need a 10 to 20 year game plan. You only ever make money in buy to let if you hold your properties through a property boom. The next one in the UK is out of sight over the horizon. (Although the OBR did say yesterday they expect a "normal" UK property market by 2016).

[Wokkafans]

Having been renting out a number of properties for some years I'd go along with most of the advice given, especially regarding being a good landlord! Be proactive and ahead of the game on addressing potential problems that may arise. As a simple example, get the gutters cleaned in the autumn and don't wait for the tenant to tell you there is a problem. Make sure you let them know you have done this. This is a double gain as the tenant feels cared for and is less likely to move on, and you get to write it off against your tax liability. :)

When drafting the lease put in a clause that the tenant(s) are liable for a professional clean on moving out, this to include the oven and carpets/curtains. Be up front on the likely costs of this and be willing to provide receipts for previous tenants if asked for. Most tenants are happy for this cost to be deducted out of their deposit so just agree (in the lease) that you will submit the receipts to the agent/tenant and the agent will then deduct these costs before the remainder of the deposit is released.

Also make sure that the tenancy agreement has a clause for a rent review after 12 months and a professional inventory check-in/check-out is essential to avoid any dispute regarding any damage that may have occurred. Be realistic with the rent review - getting a 5% PA increase is not a dead cert anymore. That said, we have just undertaken a rent review on one property and used the current RPI of ~5% as justification and the tenants were happy with this :ok:

As to references, we always request these and also require a credit/security check. Additionally, we would never let out unless we have met the potential tenant though this may not be so simple in your case. The costs of these checks are bourne by the tenant.

If you have a good relationship with your existing tenant do ask them for a reference on yourself as a landlord when they move on. A good reference for yourself is reassuring for any potential tenant and can swing a decision in your favour in a weak market.

For those with the time/inclination short-term business lets can be a lucrative rental market. Rents are roughly twice that of 'traditional' lets though you need to consider your market carefully regarding potential demand in your area. You will also be stung with higher agent fees (10-20%) and may have increased void periods. Only consider this if you are sure the demand is there and take a low base-line figure of 50% occupancy and then do the maths to see if it is worthwhile. In our case the demand is there with a large number of people coming to the area on secondment and not wanting to stay in a hotel for 3-6 months. Overall, we get a 75% higher income by doing this over a standard let. However, if you later find out the demand is not there (if you do your research first this shouldn't be the case :=) you can always fall back on 'traditional' letting to cover your costs.

Good luck,

WF :ok:

[Party Animal]

Thank you everyone for your positive replies - exactly what I was hoping for.

In my case, it's relatively simple in that it is our family home that we decided to rent whilst living in quarters a long distance away. We are not in the buy to let business and will move back into our house at some stage over the next few years. RBS who my mortgage is with, have no problem with SP doing this and my mortgage remains exactly the same as it was. I have had to register as a landlord and my buildings and contents insurance package has been changed to 'landlord' insurance which cost about 10% more than normal.

The rest is in the hands of the Letting Agency and I will just have to see how that works out. They were not very helpful on the tax questions I had other than telling me that I had to tell IR that I was renting. They also said that because our mortgage was in joint names, I couldn't rent out the property in the name of Mrs PA only. As Mrs PA is currently a housewife, I thought that may have been a way to reduce the tax burden?

Bottom line though and following the good advice above; keep detailed financial records of every transaction involving the house and find a good beancounter to dot the i's and cross the t's.

Thanks to all....

[orca]

As per a post above, my mortgage company wanted to increase my payments by 1% when we moved (and therefore let) due to service reasons. All it took was a letter and they waived this. I got the impression that both the 1% hike and military waiver were SOP.

[The Old Fat One]

As per a post above, my mortgage company wanted to increase my payments by 1% when we moved (and therefore let) due to service reasons. All it took was a letter and they waived this. I got the impression that both the 1% hike and military waiver were SOP.


That's pretty much correct...most mortgage companies apply a 1 - 1.5 % surcharge on "permission to let" and then immediately waiver it for serving military personnel.

You may be interested to know that there are in the region of the thirty thousand active complaints with the FS Ombudsman over this surcharge (I have one of them), so they may find it gets stuck right back up them in the way loan insurance has.

I ******** hate banks. And that pre dates the credit crunch by about thirty years.

[Clearedtoroll]

If the house is in joint names and Mrs PA is not earning... then I think you will only need to pay tax on half of any profits, as she can use her tax allowance for her half. OTOH, if you make a loss on the property once mortgage interest, agent's fees and allowable expenses are included, then the downside is you can only offset half that loss against your salaried income. Either way, I think you'll not end up paying much tax.

[Whenurhappy]

On the issue of letting surcharges on mortgages, we were advised by a particularly good broker that we have used for the last 5 properties/mortgages to advise the lender from the outset that, because of my employment, we would be required to move on a regular basis and would therefore let the property. Our current lender got rather shirty about 18 months ago when we went abroad and proposed a 1.5% surcharge, plus a whopping admin fee to make our family home a 'buy to let' property. After a fairly long battle, the company agreed that we had disclosed our intentions when they agreed to mortgage our property so they waived the surcharge, waived the fee and paid us GBP500 to boot!

They also agreed to have the property independently valued (gratis) as it is a large Victorian property sandwiched between some much older terraced cottages in a National Park. When we considered a further advance, they applied the usual RICS formula and stated that the Loan to Value ratio was too high - based on an assumed market value distorted by the small terraces nearby. I protested and they agreed that they had made a mistake and hence a free GBP500 valuation. Result!

Bottom line, keep meticulous records of all expenditure (hard copy and electronic - scan all receipts as most seem to fade nowadays) and keep safe all correspondence with HMRC, your bank and mortgage lender - plus notes of all telephone calls and discussions - and get names!). A simple yellow treasury tag and a hole punch(raid the back of the Sqn stationery cupboard) and file everything sequentially. It builds a narrative! Be a good landlord - our property in WB was on the corporate let market for a number of years and although it was being professionally looked after I did pop in from time to time when I was in the area. It was nice to meet the tenants (and they made sure the house was spic and span knowing that I was visiting), and generally there were a few niggles that needed simple attention.

[Lingo Dan]

Having a good agent and a good accountant is pretty important, especially if HM posts you to a place where it's not easy to take care of stuff like tax returns.

I had property let for about 15 years when I was working overseas, and reckon that the accountant covered her fees by what she saved us in tax. Perfect tax returns also will ensure that you are the "grey man", and HMRC will be less likely to take a deeper interest in your business.

[Al R]

Changing the direction of the topic a little.. if a serviceman/woman buys a house and rents it out because she is living in a Married Quarter, what are the rules concerning paying CGT when that house is sold?

If you own a house and don't live in it purely for service reasons, I assume that CGT is not accrued for that period, fair enough - in keeping with HMRC general guidance. But the moment that you can live in it and choose not to, or decide that regardless of whatever happens in the future you won't be living in it.. what happens to your CGT liability - does it start building up again and how is that point in time determined? How is HMRC able to put its corporate finger on a calender and say 'Aha Mrs X, you started accruing CGT.. then''. Can you live in a Quarter, own a home and sell it whilst still living in SFA and avoid CGT from when you rented it out and until you sold it?

There is lots of general guidance and quite a bit of contradictory anecdotal evidence on the web but by way of getting a perspective, does anyone have a military angle on this, ideally, based on personal experience?

Much appreciated. :ok:

[Jumping_Jack]

We were advised by HMRC that to avoid CGT you have to demonstrate that the house you are selling is your primary residential address. There doesn't seem to be a fixed period over which you have to demonstrate this but the suggestion was 'about a year'. That said, the HMRC advisor I spoke to said that they were pretty pragmatic with regard to service personnel that had been living in MQs and had moved back into their own house and then had to move for civie job. Essentially they assessed on a case by case basis and are just out to ensure that the folks 'don't take the piss'!

[Al R]

Jack, thanks for that :ok:.

The scenario I have in mind is that a service client has been in SFA for the past few years and have only now decided to sell what was previously a private home. There is now no intention to move back into it.

I understand what I might get here isn't concrete; I was just trying to get a steer.

Cheers.

[nice castle]

Don't forget the private landlords letting relief which makes a big dent in the CGT if there ends up being any to pay.

It's all in the book 'How to avoid property tax' by Karl Bayley, available at taxcafe.com and elsewhere. Just make sure it's the latest version you buy.:ok:

[Al R]

Excellent, thanks. :cool:

[Whenurhappy]

Jumping Jack - to legitimately avoid CGT, register the property that you are letting (and the one that you might sell first) as your 'Principal Private Residence' therefore there shouldn't be any CGT to pay of you sell it. You can then flip the PPR to the next property - jsut like MPs do/did. Keep the letter in a safe - it might be worth 10,000s GBP - HMRC came after us - and had lost the original PPR approval. I served a notarised copy on them (and as mentioned above, got a buttock-clenching appology form them).

Cleared to roll:

Losses cannot be offset against your other (salaried) income. Up until 1 Apr 11, you could do this for Holiday Lets, but EU ruled that this was illegal. HMG did fight this one - but lost. Losses can be rolled forward to offset gains in future years.

[Jumping_Jack]

Register the property with whom? HMRC? The feed I was given was that one need to demonstrate the house as a primary residence through such evidence as utility bils, voter registration etc.....:confused:

[Whenurhappy]

You should write to your tax office and sya something like:

I am advising you that our property at 123 Cosy Close, Little Snoring, Loamshire is our principal private residence however because of my service in HM Forces we are living in Service accommodation at RAF Lincolnshire/Ramstein/Wherever. The property is currently let.

This means that if you sell the property without having lived in it (although it was your intention to do so) you can demonstrate to the Revenue that it was your private residence. HMRC will write back to you confirming that it is your PPR. Let's say that your have two rental properties - declare the one that you intend to sell (or the more valuable of the two) the PPR. When that's sold, write to HMRC and advise them which is your new PPR.

[teeteringhead]

Best advice - particularly if out of country - get an accountant. We let Teetering Towers (in Milady Teeter's name) whilst overseas (well - NI ;)) and the £200 - odd we spent on her (the accountant) paid back in spades.

IIRC even one flight back per year was deductible.

[Tankertrashnav]

I am advising you that our property at 123 Cosy Close, Little Snoring, Loamshire is our principal private residence


Gosh I'd love that address - any idea if it's likely to be up for sale soon? ;)

[WPH]

Party Animal,

I was in the same situation as you for the last 3 years. I have kept my own records and filled in the self-assessment forms myself with ease. I haven't had an accountant and I'm not convinced they would help much. You basically add up the income, take away the allowable expenditure (mostly correctly identified above), then split the "profit" between you and your wife. If your wife has no other income, she'll be well below her threshold - HMRC told my wife to not even bother submitting a tax return. You'll then pay tax at 40% on your bit.

There are leaflets online describing what is/ is not allowable expenditure. I thought it would be a good idea to pay my wife to do the books/ repairs/ manage property etc to use her full tax allowance- but you can't do that if she is a joint-landlord. You can claim expenses to make visits to the property but HMRC are wise to landlords making multiple visits to overseas rental properties to make 'repairs'!

As a guide, we have a property letting for a similar amount with a similar mortgage (albeit the interest component is only roughly 250) and with only a few small repairs per year, I end up paying around a grand in tax per year.

That said, many of my friends pay no tax and some own multiple properties, so perhaps I do need an accountant!