Tax help for someone who already owns the property they want to rent out

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    Tax help for someone who already owns the property they want to rent out

    Hi all,

    I am a newbie to the forum so please be gentle. My situation is as follows. I now own a one bedroom house in Shrewsbury having bought this over the last 25 years through a mortgage which has just completed. I have had the house on the market for the last 10 months or so without even getting as far as an offer being made to me.

    My life situation is such that I want to move quite badly, so renting my house out is the next best option, particularly as the selling price I would receive now is as low it is likely to be for some time past or future. I understand that as I own the property and don’t have a mortgage that all the rent minus expenses would be taxable.

    I do also have considerable debt on credit card so one avenue for me to pursue would appear to be selling part of my house back to a Bank in an equity release type mortgage to give me the money to pay these debts off in part or whole. The questions I therefore have would be as follows

    1) Would I be able to get some sort of mortgage on a house I already own if this house was to be then rented out? The amount I would need to borrow would not exceed 40% of the property and I could borrow considerably less than this if there are thresholds at which it becomes cheaper to borrow or easier to obtain.
    2) Presuming the answer to 1) is yes, can I then use this mortgage (or equity loan as it would most likely be called) to offset my profit made in rent thus reducing my tax burden or would HMRC take the view that as I have already owned the property outright this offset would not be allowed?

    The likely rental income on the property would be around £350 - £400 p/m and I just break into the 40% tax bracket mainly due to the amount of overtime I work so I fall into the unlucky category.

    I would appreciate any assistance on a financial strategy to my situation,

    Many thanks

    RobC

    #2
    If you are able to release the equity in your house, what would you use the money for?

    Comment


      #3
      The short answer to 2) above is Yes.

      Comment


        #4
        1. You have to make your own enquiries to Mortgage lenders for BTL mortgage as what you can borrow depends on your credit rating. You can find a list of BTL offers at moneysupermarket.com

        2. The annual interest paid on the BTL mortgage can be charged as an expenses against the rental income to reduce rental profit (and tax.)

        Comment


          #5
          if youre looking to move to a different town/city, perhaps consider a let to buy mortgage as opposed to the usual buy to let, as others have suggested, speak to a mortgage consultant?

          Comment


            #6
            Hi Gordon/KIng Maker,

            Could you please clarify something for me.

            I thought that the interest from the re-mortgaged money could only be offset against the rental income, if the money was used exclusively for the rental business. The OP states the money is to pay off already accumulated debts.

            Comment


              #7
              Originally posted by Mrs Mug View Post
              Hi Gordon/KIng Maker,

              Could you please clarify something for me.

              I thought that the interest from the re-mortgaged money could only be offset against the rental income, if the money was used exclusively for the rental business. The OP states the money is to pay off already accumulated debts.
              You are correct that it's the purpose of the loan which governs the deductibility - purchase of the property, maintenance etc are obvious ones.

              However, the refinancing of the capital account(s) of the business is another - although less well known one. See example 2 from HMRC's Business Income Manual :

              http://www.hmrc.gov.uk/manuals/bimmanual/bim45700.htm

              HMRC opened the door for this deduction when the old Schedule A regime changed to a rental business a few years ago - though quite a few Tax Inspectors are still not even aware of it!! It is nothing new for a normal trading type business, and I have come across it many times for firms of solicitors, accountants etc.

              Comment


                #8
                Thank you for the reply.

                I'm glad that I use an accountant to do my tax return.

                Comment


                  #9
                  Originally posted by Mrs Mug View Post
                  Thank you for the reply.

                  I'm glad that I use an accountant to do my tax return.
                  You're welcome.

                  Comment


                    #10
                    Hi there RobC and welcome to property investing.

                    I am sure if you built an experienced team around you and you are open to many opportunities and suggestions then you will do just fine.

                    In regards to mortgaging your property here are some considerations:

                    1 - You are increasing your own personal debt, what happens if something goes wrong in your life and income dries up. I am risk averse when it comes to my personal assets and aggressive when it comes to property investing, so forgive me.

                    2 - The interest you can claim against your property income

                    3 - I work on the basis that the rent less property management costs is double the level of mortgage interest. I do this to protect myself from interest rates being pushed up.

                    PM me and I will send you my personal guide to property investing.

                    In regards to property:

                    1 - Work out the ROI on the property Net profit / amount of money tied up in the property and aim for about 10 - 15% (if not more)

                    2 - I work on the basis of rent yield (gross rent divided by purchase price) as at least 10% as this gives me a guide whether or not the property is worth renting out.

                    If you are a high tax earner it may be worth setting up a limited company, if you are going to have more properties, that charges you for managing the properties.

                    Best of luck in your property adventures.
                    Warm regards

                    Simon Misiewicz
                    Property Tax Specialist & Property Investor

                    Comment

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