BTL Related Tax Question

You haven't explained this unambiguously enough. When you say "minus the mortgage repayments" do you mean the loan interest *both* on her BTL mortgage *and* on his extra borrowing, or do you mean just on her BTL mortgage? If the latter, then she is in fact making a loss.

OK, perhaps it was unambiguous. If the husband is paying out x while only x/2 is coming in, that confirms there is a loss being made. Hence no profit and no tax.

If there were a profit, the rate of tax she would have to pay would depend on what other income she has. If none, and the profit is less than the personal allowance, she would pay no tax.

Okay, so it seems that as a pair they are making a loss, therefore no tax. If there were a profit, how do the couple's allowances combine to affect the rate of tax?

Also, would the couple be able to "write-off" maintenance expenses against tax? And if so, at what rate?

Finally (and thanks for the help BTW), should these two both be doing self-assessment?

You've said he is a HRTP so obviously has no allowance left. You haven't said what her other income is. If she has none, then she could have up to about £5k profit from the rental business before any income tax becomes due. Accordingly it would be sensible to consider the rental business 100% owned by her, so that no extra tax is paid by him in respect of any rental profits.

Expenses are never set against tax directly, they are set against income. The effect is to reduce the profit on which tax is paid. For example: Annual rent income might be £8k, mortgage interest £6k, insurance £500, maintenance £500, hence profit £1000. If she had other income in excess of the 10% band, she would pay income tax at 22% of this £1000 profit. A rental business does not count as self employment, by the way, so there is no National Insurance to pay no matter what the profit is.

He need not if taking no active part in the business nor making a profit on loan interest.

She need not unless the rental profit changes her tax position, so if she has no other income, and her profit is less than the personal allowance of approx £5k, there would be no tax to pay so no need to complete a tax return.

But it might be useful to do so all the same [calm down, dear, it's not "taxing"], if there is a prospect of her loss turning into profit at some stage. The point being that if her loss now is properly documented, it makes it easier to carry forward to be set against future profit.

Lets say her income is about 12K annually.

So it seems that, in this situation, he is better taking no active part. One final thing I'm still not clear on is this: if the husband takes no active part, can the interest-only payments of "x" he is making be taken into account in the wife's profit/loss calculation?

Thanks, D

OK, in that case it's still better for it to be 100% hers, since all the rental profit would then be taxed at 22% and none at 40%. It's only when her other income plus rental profit takes her over the HRT threshold that the excess might as well then be his, though there wouldn't really be any advantage in splitting it.

Yes. You need to think of him being a loan middleman. He borrowed this deposit money from his bank, and then *lent* it to his wife. She is paying him exactly as much interest as he is paying the bank, so he is making neither profit nor loss on the loan. That way the "x" payments are part of her expenses and so it can legitimately be deemed that she is making a loss.

Ah! What a useful nugget of info. It's been so hard trying to find this stuff out from HMRC website. Thank you very much.