Rental income - clarification on tax

Hi all,

Enjoying all the forums with detailed info and educating advice.
May appear to be an obvious question, but after a lengthy pub "chat" with friends.. - I'm looking for clarification on tax liabilities on rental property/income, suppose its best if I give examples.

1) Friend A - currently has a rental property and states that he is only liable for tax on the profit after the mortgage repyment has been made, e.g.
Rent 800 p/m
Mortage 700 p/m
=> tax liability on the 100 profit

2) Friend B - also has a rental property and states that all income - rental - is subject to tax, and you offset expenses at the end of the year, i.e. not just taxed on the profit, but on the whole rental amout, e.g.
Rent 800 p/m
=> tax liability on entire rent, and you offset expenses at the end of the year against 9600 (800 *12 months)

3) My understanding is that friend B is more correct, but one of the expenses is the INTEREST on the mortgage, so this can be broke down as a monthly expense, e.g.
Rent 800 p/m
Mortgage - INTEREST ONLY - 550 p/m
=> tax liability on the 250 profit

Which if any of the above is correct?
Basically I'm looking for definative/concise information...

Thanks

HomersCash said:

Basically I'm looking for definative/concise information...

Click to expand...

Don't mean to be smart/curt but you really should be talking to an accountant if you want this.

I was actually talking to a financial consultant / mortgage advisor at the weekend and they stated friend A - i.e. only tax liability on profit.

But when I look at info on revenue's website, it gives info such as;
Gross rent £15,000
Less:
Insurance £ 800
Ground rent £ 300
Electricity/Heating £1,200
Repairs £1,900
Wear and Tear
7,000 x 12.5% £ 875 £5,075
Profit rent £9,925
The taxable rental income is £9,925.
Taken from: [broken link removed]

Which kinda contradicts financial consultant.

So - seeing as members in this forum are highly informed about financial matters, and in particular this "Property Investment" forum/discussion, I thought this was a basic question as most people in property investment, rental properties would easily know the answer to this question as they themselves have been through it???

Homer


You are liable for tax on all income less cost of allowable expenses such as you have listed.

The interest only portion of your mortgage payment is an allowable expense in this regard.

HomersCash said:

I was actually talking to a financial consultant / mortgage advisor at the weekend and they stated friend A - i.e. only tax liability on profit.

Click to expand...

Was this financial consultant/mortgage advisor qualified and authorised to give tax advice?

Tax is payable on profit after allowable expenses - the key point being allowable expenses, of which only the interest portion of the mortgage repayments is allowed by Revenue.

Thanks for the replies all.
And clarification that only the Interest on the Mortgage is an allowable expsense.

Clubman - hes not an accountant, so as such not in a qualified position to give tax info, however he has a lot of clients (for whom he arranged mortgages and provides financial advice) who have rental properties, who he assists in filling out their tax return form (re rental income) at the end of the year - so while not an accountant he has regular dealings in this area....
But from the replies, his info is obviously incorrect!!

Do bear in mind that this joker's clients will have absolutely no recourse against him if they are faced with future tax/interest/penalty charges from the Revenue and/or tax settlement publication or prosecution, on the basis that he is clearly not competent enough to be giving tax or accountancy advice.

He's made the owning of an investment property more attractive. That's his game. In the early years the interest element is fairly large so not much tax paid but in the later years interest amount gets smaller so more tax due.
Tell this financial adviser he is giving incorrect info. If you know any of his clients tell them they need to get independent advise and should get their tax returns in order.

Ubiquitous and asdfg, thanks for the replies re-inforcing earlier comments.

Great point about the fact that interest is higher at the begining of the mortgage, so for the first number of years - his (financial advisors) advice/info makes sense/adds up!! :mad:
I feel like putting in a joke of something now to lighten the mood - but I guess theres a different discussion forum for that...

Investors should weigh up the pros and cons of opting for an interest only mortgage on the investment property. See here.