Supposing I bought a new house for us to live in, but kept the old one and rented it out. Am I right that I would have to pay income tax on any rental income, and then CGT if I sold it later?
Yes, CGT kicks in after 3 years IIRC
You can offset the income against the interest part of any mortgage on it, insurance and maintenance bills.
Yes, but as interest is deductible, it makes sense to borrow as much as possible (or needed) against the rental property as this reduces the tax bill whereas interest paid on your new house will not be deductible. CGT will be payable but you will still benefit from the exemption while it was your home plus any house that has been your home the last three years qualify for the exemption. So if you lived in it for 10 years, rented for 10 and then sold, only 7/20 [(20-(10+3))/20] of the gain would be taxable.
yes. you need to tell your tax office and complete self assessment each year
http://www.hmrc.gov.uk/report-changes/individual/income.htm
http://www.hmrc.gov.uk/cgt/property/basics.htm
as a landlord I am fairly sure that mefty speaks the truth here.. Althouigh I would seek the advise of an accountant as despite being a genius engineer with an excellent grasp of the english language and numbers I still cannot save as much as my accountant can on my income every year, its worth the money.
Speak with the tax office. I rent a property and the tax office just adjusted my tax code, it saves self assessment. Once you self assess once you will always have to do it.
In terms of CGT if you are married you can use both allowances to ease your pain, but it does have to be paid UNLESS you flip. 6 month before you you want to sell your second home, move tenants out, tell council tax folks you now live there and your partner now lives in the other home. You will both pay 75% council tax on each house but after 6 months the property will no longer be your investment propery but your main residence then no tax to pay at all when you sell-happy days
PS this is dependent on this tax loophole nor being closed
Mantastic - that is not right, there is only one PPR for a married couple.
Mantastic, how did they adjust your tax code without you doing self assessment to know what your additional income was?
CGT kicks in after 3 years if second or more home in your name. If you move back in for ( I think ) 6 months then CGT is not paid.
Any net income is taxable through income tax, up to £2k limit can be paid through your following years PAYE code. If your only renting one property online self assessment is the way to go and quite straight forward once you get all the stupid access codes etc sent to you.
I rent out my house whilst living with my good lady.
The paper tax return looks mind blowingly complicated, but do Self Assessment online and it's not that bad. Get all your figures together for income together with what you can claim "back" (as mentioned above eg mortgage interest) and it's straight forward.
As FunkyDunc says, register for SA online well, well in advance of any filing deadlines to allow for the access codes to come via snail mail.
SA online takes me about 20 minutes to do. Once you've done it once, keep your numbers in a coded spreadsheet, and it's dead easy to do next year.
Ok cheers. A few things to think about.
FunkyDunc - I have had a quick look at the legislation and I can't see where you get this six month rule from.
IIRC there is no six month rule. Just that principal private residence is exempt from CGT. Therefore you can re-exempt a property by moving back in. Evidence this with utility bills etc showing you live there and HMRC are happy to accept this. You don't need to stay as long as 6 months either.
Meft you are wrong re married couples "A rare perk of married life! Transfers between spouses are not taxed, and you both get an annual CGT allowance.
This means you can transfer enough of your assets to your husband or wife for him or her to sell to use up their own allowance.
This effectively doubles the CGT allowance for married couples. You might get into a fight though if you’re both keen investors with your own gains to realise"
In regards to six months, its not greatly advertised but yes in general you have to be living there 6 months(or at least prove you have been there) for 6 months. I keep my bank details etc at my rental and have a mail re-direct going on. Makes life easier in future when proving it's mine and mine only if the bank can say it's been my address for last 17 years
[i] but kept the old one and rented it out[/i]
don't bother; sell it once you're in the new place, if you haven't already.
Owning a rental property is fine if the decor & garden are up to date, but it only takes one bad tenant to be in for a year to trash the place. Then it becomes a very expensive PITA to put right
Ah, you were talking about the annual allowance that is a different matter as that only covers approximately £10K, I thought you were implying that you could get two principal private reliefs ("PPR"), which you can't. There is no six month rule, but as long as you live in a property then three years can be exempt in line with what I said earlier, but and this is an important point you need to be able to shift your PPR election, which can only be done when you buy another property if I recall correctly. Thegreatape doesn't need to do this because he has already lived in the property.
Again I have to back up Mefty here. But remember CGT is only a problem if you sell. It makes sense to look at your yield from investment if its good, why would you sell? Annuities are crap as are most other investments, a prior owned proprety with a low ish mortgage can be kicking out a very high yield. CGT may be the least of your worries.
John Drummer must have had really bad luck. I've been in the landlord game for 10 years and have never had any experience like he describes. I know 20 odd other landlords in Exeter and Plymouth and none of them have had anything like that happen either.
You can also get "letting relief" on the period in which the property was let.
What has been said about interest is correct, you are better off borrowing against the rental property as interest is deductable (although only upto the value of the property when first let)
The CGT relief is principle private residence relief. Effectively you time apportion the period of ownership and pay tax on the period which relates to letting. As stated above, the last 3 years count as being owned (currently) so are free from tax.
Mefty's calculation is correct on periods taxable.
There are a few other "quirks" for example if you were to move back in, this deems any period (upto 3 years) of non absence as occupation, so again increases the period of occupation.
If you have multiple properties, there are two plans of action, you can either elect for one property to count as your principle private residence (main home effectively) or it can be based on fact. Obviously if one property is let, then you only have one left to occupy, but it may be worth electing to avoid any doubt.
I'm a tax advisor by profession, so apologies if I've got a bit too carried away!
PS give me an email if you need any assistance!