I Want to Rent a Property.......Questions

[FieryP125]

I bought a property with a girldfirend several years ago, we have no split up and I am back with my mum and dad. Rather than sell this property I wish to rent it out and have some questions I hope you can help me with:

I know about going through ARLA registered agents for protection, etc - my main queries are the tax implcations.

My mortgage is approx �400pm and I was hoping to obtain �600pm rent. A profit of �200pm. I am assuming I wont be taxed on the profit I make, but rather the �600pm ( �7200pa ) rental income I receive.

How do I go about my taxation status? If I start renting the property out now, do I just submit a self assessment form in Jan 2009? Do I have to let anybody know?

[Tom Braider]

No, Fiery, it is the profit you'll be taxed on. From the gross rent you can deduct the mortgage interest and any other legitimate expenses - agent's fees, for instance. If the property's furnished the allowed expenses can get a bit complicated - have a look on the HMRC website for the lind of things that are allowed.. You will need to get a tax return - you can ask your tax office to send you one or you can do it online - but you don't need to notify HMRC within 3 months like you do when you start self-employment. Your mortgage lender will probably want to know, as will your insurance company.

[FieryP125]

Will my tax that I pay via my employed job be affected?

I have a mortgage on repayment terms - can I still deduct the mortgage interest?

[Tom Braider]

1 No, not unless you choose to have the tax on the rental income collected through your tax code - which isn't a bad idea, actually.
2 Only the interest, not the capital repayment. Your mortgage statement will give both figures.

[FieryP125]

Having the tax come out through my tax code sounds the best way - better than tax returns, etc. How will they know what my profit is though?

Would they just take it out monthly or in one lump sum in April?

[FieryP125]

I've looked on the diret.gv website and it doesnt seem to give this option - only says you have to complete online tax assessments

[Tom Braider]

When you've done your tax return and either you or HMRC have calculated the tax due, you can eitehr pay it in 2 lump sums or have your code adjusted. Either way, you pay the tax in the year after you received the rent. Suppose your net income from the property was �520 in the year ending 5 April 2008. You'd either pay �260 on 31 January 2009 and another �260 on 31 July 2009 (plus another �260 as teh estimated first instalment for the following year) OR agree to lose an extra �10 a week from your pay packet. You're not always offered this option, though; your tax office should be able to tell you more.

[buildersmate]

Yes, Fiery, you would generally do a self-assessment tax return for this type of income. This is far better than the pay-as-you-go PAYE system because you won't know until after the end of the tax year in April how much profit you have made (so its a bit hard for the tax by be taken out by using your coding). You then do a tax return sometime between April and September-ish. You have to pay the tax by the end of January in the following year. That gives you a whole 10 months for the due tax on any profits made to sit earning interest for you.

[buildersmate]

(Above comment constructed before TB posted his)

[FieryP125]

Brilliant

Think I understand now.

So to clear it up I will go down the tax self assessment route and you pay the tax twice a year

Also if I'm charging �600pm ( �7200 pa ) from this figure I can deduct expenses like repairs & property insurance, but also my mortgage interest. So I would then have a profit of approx �5000 say and I would only be taxed on this - 22% I think.

So If I was going to start this in May 2008, I take it I have to inform the revenue I'm doing this or do I just submit a tax return in Jan? So if I start in May 2008 I pay no tax until Jan 2009 and again in July 2009