Tax on rental income

I am considering renting out my flat, however having done some reading, it would seem that the rental income would be combined with my income from employment and taxed at 40% rate - and apparently, can only claim 20% of my expanses (mortgage interest etc.). That is very high, so am considering some ways to reduce the tax burden - can you please advise on what the options are: Assigning the full rental income to my parents - who have no income and are fully reliant on me. Is that possible, with me being the owner of the flat? I don't think I can transfer the flat to them, as I have mortage on it - but perhaps the bank would allow me to add my parents as additional owners, would they be allowed to receive 100% of the income (and tax it in country of their residence - outside UK, EU country)? Utilise the rent a room allowance of 7500 (I would rent the whole flat, not living there myself) Utilise any other allowances (think there's 1000 GBP rental income allowance, but presumably that cannot be combined with the 7500 rent a room allowance) I have also read that when the net rental income is below 2500, then self assessment is not required - though presumably this again cannot be combined with other allowances? Essentially what I am asking is how to protect my rental income from high taxation. My mortgage payment interest is around 15000 per year (on top of that, I have to pay service charge, ground rent and other expanses), expected rental income could be around 25000. If I am only allowed to claim 20% of the interest, that 3000 per year + 1000 rental income allowance, then the tax I'd be paying would be something around 40% of 21000 = 8400 GBP, meaning I'd only end up with something like 1600 net per year for all the hassle of dealing with tenants etc. - surely this cannot be right? Can you please advise - surely this cannot be right, HMRC taking 8400 and me only getting 1600 in the above case - that would be 84% taxation (not even counting other expanses such as ground rent etc.), clearly I am missing something here.

Hi ,
 

The legal and beneficial ownership of a property may be separated by a valid declaration of trust.   Please see TSEM9150: Trusts, Settlements and Estates Manual . How you split the income is up to you.  It could be 100% to your parents and 0% to you.  As a general rule of thumb the UK has first taxation rights on any UK property income.  Any tax charged here is usually taken into account in the country that you are resident in so you are not taxed twice.  To be sure you would need to check the double taxation treaty between UK and whatever country your parents are resident in. Rent a room relief is only available if you are renting a furnished room in a property that you live in yourself.  You would have to be a live in landlord to get that. You can claim the property income allowance of up to £1000 a year but if you claim the property allowance you cannot claim a separate deduction for your expenses. The £2,500 limit is self-assessment criteria not an allowance that can be added onto other allowances. You do not have to only use the £1,000 property income allowance.  That is optional.  You can take out some of your actual costs instead of using that allowance.  Help working out your net property income can be found here: Work out your rental income when you let property   . Thank you .

Thank you for the information - much appreciated. Can you please confirm: The declaration of trust - where, how would I need to submit it in order for HMRC to recognise this and not require the full tax from me? Or can I simply write the declaration of trust (using the example you linked), have a copy of it myself and another copy for my parents - and don't need to submit it anywhere? As for the 'default' taxation, are my calculations above correct - would rental income really be taxed at 90% effective tax rate - assuming approximately 25,000 annual rental income, 15,000 interest payments and 1,000 allowance (with no expanses being allowed) = paying 40% of 25,000 = 10,000, with the 1,000 allowance I would be paying 9,000 annual tax on rental income, which would only leave me with 1,000 of net income for myself? Even if I claim expanses, that might be around 2,000-3,000 GBP per year, it would still pretty much leave me with nothing if I pay 15,000 interest to bank, 9,000 to HMRC and only keep 1,000 myself - is that correct or am I missing something here?

I have a simiilar issue on rental income taxation. I have a full time job and a flat that I rent out. As per my full time income, this has already been taxed. I am wondering how to separate my full time income from my rental income when submitting a self assessment for my rental property. Suffice to say that adding my rental income to my income from work is likely gong to put me in the 40% threshold. Thanks for your help and advice on this.

In relation to the Income from Rental Property into an (SPV) Special Purchase Vehicle. My plan is for my Limited Company to loan my SPV £250,000 from it's profits (Corp Tax has already been paid on this) to purchase a property outright. Then from the rental income pay off the loan back to my Limited Company from the SPV. If i do this is there any Tax Liability on the rental income from the SPV or any Tax liability on paying the loan back to the Limited Company. Any advise is greatly appreciated.

Hi johne,
You will tailor your online tax return to show your different incomes.
Please see guidance here;
How do I tailor my Self Assessment tax return?
Thank you. 

Thank you - but after watching the video, it did not actually answer the question - let's suppose below scenario: Assuming approximately 25,000 annual rental income 15,000 interest payments 1,000 tax free allowance (with no expanses being allowed) Being in Higher tax band of 40% from my employment income So based on that and the fact that I can only claim 20% of my interest payments as expanses (not even counting all the others - service charge, ground rent etc., need to look into those further) Then my calculations (hopefully incorrect) are: Paying to HMRC 40% of (25,000 - (0.2 x 15,000)) = 40% of 22,000 = 8,800 tax. Now I use the 1,000 tax free allowance, but still need to pay 7,800 tax. So in reality, I get 25,000 rental income, pay 15,000 interest to my lender and 7,800 to HMRC, I am left with 2,200 = effectively 78% taxation (not 40%) on rental income. Is that correct?

Hi ,

Thank you for your question. A Solicitor is not rquired when creating a declaration of trust . A trust deed is a general term for a document which contains the terms of the trust . A declaration of trust is a type of trust and is a document by which the person or people who own as assess delare that they hold it on trust in specifed shares. Evidence of the unequal shares should be provided with the form 17.  With regards to working out what tax is due please see the following link for how to work out what tax is due : www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income#how-to-report-your-taxable-profits Work out your rental income when you let property  Thank you .

Thank you - however when I had a look at Form 17, it would appear that it only allows me to fill a spouse / civil partner for joint ownership of a property. What I need is a form to declare my parent as a beneficiary of the income from the property, while me being the sole owner. What form can I use please? Also - what evidence is required? Is it copy of the written declaration of trust? Thanks

Hi Jon,
This is a tax planning related question and you should seek professional advice.
Thank you.

Hi Wojciech,
We cannot offer financial planning advice and would not be able to confirm your calculations on this forum.  For help with this please use the link below to guidance on our webite:
Rental income
Thank you.

Hello, I have a rental income from a property I own 100%. Can I gift all the rental income to my son who is a university student? Does this mean that the rental income will be taxed as his income or do I still need to pay tax before gifting it? Will he need to declare it in his self-assessment? We are both UK residents. Thank you.

Hi, sorry perhaps there is some confusion. I am not asking a financial planning question, I don't need a financial advice from you. I am asking two questions - which should be fully within HMRC's remit: Are landlords really liable to pay approximately 80% tax on their rental income - or am I missing something? I was told that Form 17 can be used to declare a different beneficiary owner of a property (from a legal owner) - as far as I can see, it only contains field for a spouse, not a parent. Which form can I use? Thanks Wojciech

Hi,
 

There is no form if you are not married or in a civil partnership.  You just need to send in a declaration of trust with a covering letter.  The guidance is here: TSEM9160 - Ownership and income tax: legal background: ownership - income follows property (www.gov.uk) TSEM9520 - Ownership and income tax: express trusts - written

Thank you .

Thank you very much for the information. Can I just clarify on HRMC's exact requirements and the next steps myself and my parents would need to follow - in order to avoid potential problems and penalties. My understanding based on what you said and guidelines online is the following - can you please confirm that is correct: 1 Write trust deed (me being legal owner of the property my parents being beneficiary owners), expressing the split of income - I can look up example / template online for this 2 Send a cover letter to HMRC - stating my name, my parent's names, addresses, DoBs and explaining that I am the legal owner and my parents would be the beneficiary owners. Is there anything else I need to write in this letter? 3 Taxation - my parents live in Poland which has double taxation treaty with UK and you stated earlier that UK has first taxation rights on any UK property income - therefore: 3.1 I assume that by default, either my parents or myself on their behalf would need to submit the self-assessment each year. Is that necessary if the rental income for each of them would be below the £12,570 tax free allowance threshold (assuming they have no other income in UK)? They also do not have UTR or any other UK identifier (NINO etc.) - would I need to obtain those for them? 3.2 Does the income need to go to a specific bank account (held in my parent's name or trusts name) or can it go to any account? As they do not have UK residency, getting an account with UK bank might be difficult. Kind regards, Wojciech

Hi,
 

Thank you for your question. Information concerning gift can be found on our website at How Inheritance Tax works: thresholds, rules and allowances: Rules on giving gifts - GOV.UK (www.gov.uk) To split the rental income in unequal share, both parties must have a beneficial interest in the ownership of the property. This must be done by redigesting both parties on the property Deeds and to submit a Deed of Trust signed and witnessed accordingly to HMRC. PIM1030 - Introduction: jointly owned property & partnerships - HMRC internal manual - GOV.UK (www.gov.uk) Thank you .

Hi 

 

Thank you for your question. Taxation of income from property is charged according to what is chargeable following the deduction of relevant expenditure and other deductions that may apply from the gross rental income, The rates of tax chargeable will depend on the liability of the individual. To split the rental income in unequal share, both parties must have a beneficial interest in the ownership of the property. This must be done by redigesting both parties on the property Deeds and to submit a Deed of Trust signed and witnessed accordingly to HMRC. Form 17 is for husband and wife to solely complete. It is not to be used to cover other relationships . Thank you .

Thank you. Just to clarify though - I am not talking about husband and wife scenario. I am talking about financially supporting my parents by the rental income. I am looking for ways to do it, without having to pay 80% tax on the income. So in order to utilise this (essentially transferring full / almost full rental income to my parents), do they need to be owners of the property, along with me? Or can I transfer the income from property to them, even if they are not owning the property with me? Also - can you please answer the remaining questions from my previous post. Thanks

Hello. Thank you for your questions. Yes, please include all of that information in the deed and as it is a deed it needs to be witnessed by a third party. A cover letter is always good to make clear the intentions to the person receiving and dealing with the correspondence. Your parents will meet the self assessment criteria as non resident landlords and as such will need to complete NRL1 form (this can be done online or via post. Information can be found here : Apply as an individual to receive UK rental income without UK tax deducted  . Also, depending on the income(you stated it would be below personal allowance) but self assessment criteria is met when net income from property is over £2500 or gross over £10,000. They will both need to do this. This will enable HMRC to allocate a UTR number to your mum and dad. Finally, no specific bank is required, and it can go into any account as long as records are kept. Thank you

Thank you very much for the information. Can you please also confirm whether my parents need to be (co)owners of said property? Or can I be the sole owner and simply transfer, via expression of trust, the rent to them - despite not being owners / co-owners of the property? Thanks Wojciech