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Income Tax The net profit you make from the rent you receive will be subject to income tax at your highest marginal rate (ie it is as though the profit has been added to your income – if you are a higher rate tax payer than you will be subject to income tax at that rate – currently 40%). As a rough guide to working out your net profit take your gross profit ie the rent you receive. From this deduct all your expenses. The largest expense is likely to be the mortgage interest payment (note capital repayments are not tax deductable). Other allowable expenses include, mortgage arrangement costs, maintenance costs or service charges where applicable cleaning costs, advertising, insurance, repairs and redecoration. Capital Gains Tax The profit you make on your property when you sell it may be subject to capital gains tax. This only applies to investment properties, your main residence is currently exempt. Properties that have been used for both residential and letting profits will be apportioned according to the time spent in either use. We all have a capital gains tax allowance. Two other considerations with regard to the calculation of capital gains tax are that the purchase price can be increased in line with retail price index, having the effect of stripping out any inflationary gain. Also, a tapering relief can be applied the longer a property is owned. In the third year of ownership a 5% discount is deducted from the taxable amount each year up to a maximum of 10 years. As with income tax, capital gains tax is added to your income and charged at the highest marginal rate. For full details please refer to your local tax specialist. |
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