Death by taxes - any advice?

Landlord Discussion
22

Thanks for the explanation Cath2.

Mortgage interest tax relief in 2020: an example

Going back to our example of a landlord that charges £950 per month rental income, with mortgage interest payments of £600 per month.

** They’ll pay tax on the full £11,400 rental income they earn*
** They’ll still pay £7,200 in mortgage interest*
** They’ll get a tax credit of £1,440 (£7,200 x 20%)*
** A basic-rate taxpayer will pay £840 - no increase*
** A higher-rate taxpayer will pay £3,120 - double the tax*

So in the example above, if this was a person’s ‘only income’ given that the total is below the personal allowance I assume there would be no tax to pay?

23

Yes, no tax to pay if under the personal allowance.

But, this being HMRC, it’s not as simple as just deducting the finance charges.

You don’t deduct any finance charges if your income is under the personal allowance, so they get carried forward for future use.

Also, if the finance charges are more than the profit before the finance charges, you only deduct down to nil profit, and carry the balance forward.

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24

Few things to consider:

  1. If you are married and your partner doesn’t work or is in a lower threshold. You can reduce your tax by transferring some of the ownership to them. You will need a declaration of trust and submit a form 17 (I think!) to HMRC.
  2. You can deduct (to the best of my knowledge) mortgage arrangement fee if already paid
  3. You can also deduct any expenses (travel, fuel but be careful they should not be ‘capital expenses’) if more than £1000 per year or else u can utilise HMRC’s allowance of £1000 to reduce your tax
  4. You can increase your pension contribution (but they should be net of tax and NOT deducted at source) to claim the (25% difference to reduce tax). Instead of increasing pension contribution, you can reduce any pension deduction at source and make same contribution from net pay and claim the difference provided u r happy with the reduced pension contribution.
    The above is just my opinion and NOT advice! Do double check before relying on any of them with a professional!
25

If you are married, the profits are automatically split 50/50. If your actual ownership is different, then you can make an election to split the rent in the proportions if ownership.

If one spouse doesn’t use their personal allowance and the other is a basic rate tax payer, the lower earner can transfer some (10% rounded up to the next £10, so £1,260 at the moment) of their personal allowance to their spouse.

Mortgage arrangement fees are finance costs, so are deducted in the same way as interest.

You can’t claim a deduction for any finance costs if you claim the £1,000 property income allowance.

You can pay pension contributions of up to £3,600 (£2,880 paid in with 20% tax added by HMRC) without having any earnings. Above that, you can only make pension contributions if you have relevant earnings. (Relevant earnings for pensions purposes - RossMartin.co.uk)

If you pay a personal contribution of (say) £80, HMRC will add a tax rebate of 25% of the amount you pay in (so £20 based on £80) into the scheme.

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