Max "Tax free" div come April 6th

[Martin at NixonWilliams]

Ok quick example to aid my understanding

Salary 12k, Tax, NI paid through PAYE
Rental gross 725 per month
Rental expenses 125 per month

Do I pay 20% on the £600 per month?

Correct, as your personal allowance is used up against your salary.

Then no more personal tax on a div up to 20399.40?

and 25% on any further net dividend.

Correct again

[Scrag Meister]

Correct, as your personal allowance is used up against your salary.



Correct again

Many thanks.

That is good news and bad news

Good : I thought it was gonna be 40% on 600, but its not.

Bad : On income up to the 40% limit I actually pay more personal tax than if I didn't let the house out and took a max div.

[Martin at NixonWilliams]

Bad : On income up to the 40% limit I actually pay more personal tax than if I didn't let the house out and took a max div.

There is the tax, but then there's also the £5,760 take home from renting the property too?

Sounds like two good's to me

[Clare@InTouch]

Many thanks.

That is good news and bad news

Good : I thought it was gonna be 40% on 600, but its not.

Bad : On income up to the 40% limit I actually pay more personal tax than if I didn't let the house out and took a max div.

You could look into an interest only mortgage on the property, that would fully allowable against the income. Otherwise it's only the interest element.

[Craig at Nixon Williams]

You could look into an interest only mortgage on the property, that would fully allowable against the income. Otherwise it's only the interest element.

Whether it is an interest-only mortgage or the interest element of a repayment mortgage, the deduction will be the same amount.

If he only has £125 of expenses the chances are that the property is mortgage-free.

Hope this helps.
Craig

[Clare@InTouch]

Whether it is an interest-only mortgage or the interest element of a repayment mortgage, the deduction will be the same amount.

Pretty much what I meant, apologies if it wasn't clear. It's the interest that is allowable, but the interest on an interest only mortgage may be higher than the interest on a repayment mortgage. Thus reducing profit, and tax. Could create other issues of course, but worth a mention.

There was a thread recently about taking out an increased mortgage on a rental property that may have some interesting bits of information in it too.

[Scrag Meister]

Whether it is an interest-only mortgage or the interest element of a repayment mortgage, the deduction will be the same amount.

If he only has £125 of expenses the chances are that the property is mortgage-free.

Hope this helps.
Craig

Interest is only about £75 of the 125, the rest is landlords insurance and services cover for boiler, plumbing, electrics etc..

Planning for it to be mortgage free by Oct 2015.

Thanks for your comments, very helpful.

[ContrataxLtd]

Interest is only about £75 of the 125, the rest is landlords insurance and services cover for boiler, plumbing, electrics etc..

Planning for it to be mortgage free by Oct 2015.

Thanks for your comments, very helpful.

Scrag Meister,

Have you considered maximising the mortgage on the rental property to increase interest payments and thus reduce profit and therefore tax liability?

This might be a worth considering if you have a personal mortgage on your main residence that you could reduce by the equity released from the rental. Obviously there are a lot of other factors that need to be considered, effective rates of interest on each property, equity in the rental when purchased etc. but it could be a good bit of tax planning if your circumstances fit.

If this applies drop your accountant a line to discuss, or feel free to drop me a PM if you wish.

Hope this helps

Martin
Contratax Ltd

[Martin at NixonWilliams]

equity in the rental when purchased etc.

Martin makes a good point, this is common tax planning for rental property owners and is definitely worthwhile if the savings are significant enough to warrant the hassle.

The above point is very important. If you had equity in the property to begin with, generally you cannot remortgage the property beyond the capital introduced.

[ContrataxLtd]

Martin makes a good point, this is common tax planning for rental property owners and is definitely worthwhile if the savings are significant enough to warrant the hassle.

The above point is very important. If you had equity in the property to begin with, you cannot remortgage the property with a higher LTV than you started with.

You might want to take a read of the following BIM45700 - Specific deductions - interest: Withdrawal of capital from a business and in particular example 2.

By your logic, you are implying that if you purchase a rental property outright for cash i.e. LTV of 0% you can never take out a mortgage on it and get a deduction for interest payments which is clearly wrong.

The LTV when purchased is irrelevant, you need to be looking at the capital account of the owner when first made available to rent. In essence you can remortgage up to the market value when first rented and still receive a deduction for interest payments.

Hope this clarifies things for you.

Martin
Contratax Ltd