Rents or letting income from property

Untaxed interest

Gains from life insurance policies or investment bonds

• Your rents are not taxed before you get them so the Inland Revenue will try to collect the tax by using the PAYE system if you receive a coding notice or by a Self Assessment tax return if you are not within PAYE.



• This also applies where you have a lodger who rents a furnished room in your home and the income you receive each year before deducting any expenses is more than £4250. You then pay tax on the extra income above this amount. If the rents are below £4250 or - for letting by a couple - £2125 each, it is tax-free.



• If you need more details on this please contact any tax office.



• With second properties, you can claim certain expenses against the rents you receive and you are then taxed on the net amount. However if you make a loss this can be offset against rents on other properties you let or can be carried forward to future years to be set against profits from renting.



• A few of the expenses you can take off your rents are:
  
  
  • Repairs to property (but not improvements)
  • Decorating
  • Council Tax and Water Charges
  • Insurance
  • Advertising
  • Interest payable on a rental business loan
  • Legal & professional costs (but not those concerned with the purchase or sale of the property)

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Untaxed interest

• Many pensioners invest in National Savings & Investment products. There are three types of investments:



• Investments where the payments you receive are free of tax e.g. Savings Certificates, Premium Bonds, ISAs and the first £70 of interest on an Ordinary Account.



• Interest on Pensioners Bonds, Income Bonds, Capital Bonds and the Investment Account is taxable but paid to you with no tax taken off.



• Interest on Fixed Rate Savings Bonds has 20% tax taken off before payment to you. You cannot ask for it to be paid to you without tax deducted if you are a non-taxpayer.


• Some Local Authorities also pay interest gross and interest on Government stocks called gilts are paid gross, for example Treasury Stock. You may also have War Loan Stock, which is paid with no tax taken off.



• This section does not apply to non-taxpayers who have registered to receive bank or building society interest paid gross using a form R85. If you are a non-taxpayer please have a look here



• If you are liable to tax at 22% and you get your income without tax taken off, you will have to pay tax of 20% on the amount you receive for that tax year.



• If you will need to pay tax, and all your other income, except your investment income, is taxed before you receive it, you will only need to complete a self-assessment tax return if your untaxed income is over £2500.



• If you are liable at 40% and you get your income without tax taken off, you will have to pay tax of 40% on the amount you receive for that tax year.

• Click here to find out when you will need to complete a self-assessment tax return if you have untaxed interest.



• You are taxable at 20% on this income unless your highest rates of tax are either 10% or 40%. You can find more information on tax rates here



• If your highest rate of tax is 10% you will have overpaid tax at the end of the tax year on any untaxed interest included in your coding notice. You will need to reclaim the tax by completing a repayment claim form R40

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Gains from life insurance policies or investment bonds

• When you take out an insurance policy or investment bond, your financial adviser will let you know whether any profits you make on the policy (or investment bond) when you cash it in will be taxable. This section covers those policies where the profits (which are often called "gains") are taxable.


• You will make a profit on the policy if the amount you get when you cash it in is more than the amount of the premiums you have paid.



• Each year you can withdraw tax free up to 5% of the amount you invested originally. If you do not withdraw your 5% in one year you can carry it forward.



• When you cash in the policy, any profit you make is free of Capital Gains Tax. You can think of it instead as an Income tax gain if this is easier. This is not the same type of gain that you make when you sell or give away an asset.



• If you are a 10% or 22% taxpayer the profit that you make on the policy is treated as having already suffered tax at 20% (22% before 5 April 2004) and therefore you have no more tax to pay. It is not possible to get any of this tax back.



• If you are a 40% taxpayer there will be extra tax to pay. The profit on the policy is treated as the very top slice of your income and will be taxable at 40% less the 20% (22% before 5 April 2004) tax that you are treated as having already paid. If the profit is likely to be taxable partly at 20% and partly at 40% there is a special relief available. Please contact the Inland Revenue if you think this is likely to apply to you.

• You will need to show the profits on your tax return if you need to complete one and you will receive details of the amount to be returned from your insurance company. If you do not receive a certificate you should contact the company and ask for one.



• You should bear in mind that any life insurance profits count as your income when working out what age allowances you may be entitled to, and even though you may be a 22% taxpayer, the loss of allowances means you will effectively be paying more tax. You can see more about age allowance restrictions here

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