Buy to let and Income Tax

[Fergie87]

I have a pressing question over a buy to let property that involves the tax side of things. With google not retrieving the answer I am looking to tap into the knowledge bank that is pistonheads.

Over the past year I have been looking into buying a second property with the idea of letting it out. The only thing that has been putting me off is the tax paid on any income above the interest on the mortgage. For me this would be 40% of the taxable income.

I have recently read that if you jointly own the property with your spouse the tax can be split 50/50 which with my wife being in the lower bracket would put more money in our pockets. The problem is my wife's credit history is shocking due to poor choices before we met. This means that it is unlikely for us to get a mortgage together that is a decent interest rate.

This brings me to the question I can't find an answer for. Can I arrange the mortgage in my name and once the property has been secured then add her to the title deeds through the land registry? If this is possible can we then split the tax on income from rent or does she need to be on the mortgage?

Thanks
Fergie87

[Sarnie]

A lender is highly unlikely to accept an additional person to be added to their deeds without them being added to the mortgage also....if you are the sole name on the mortgage they would need to be able to enforce repossession on you if required.....which they wouldn't be able to do if there is someone named on the deeds but is not liable for the mortgage......

[BoRED S2upid]

If you can get a good rate on the mortgage in your name only would her bad credit history really effect things? sarnie would be able to answer but to my mind your still going to do well on the affordability criteria if she's earning.

[Sarnie]

BoRED S2upid said:

If you can get a good rate on the mortgage in your name only would her bad credit history really effect things? sarnie would be able to answer but to my mind your still going to do well on the affordability criteria if she's earning.

It depends on specifically whats on the credit file.

Things like CCJ's & Defaults would trigger an auto decline usually, with a mainstreem lender, irrespective of the other applicants credit score.........

[Fergie87]

Thanks for the replies. She does have defaults on her credit file, the accounts have been settled but if I remember correctly they stay on file for 6 years. I really would like to have a second property but it's starting to look like it's not worth the hassle for what will be around £200pm after tax profit. Do any of you have rental properties, if so have you managed to make it profitable?

Edited by Fergie87 on Monday 6th July 17:26

[Sarnie]

Fergie87 said:

She does have defaults on her credit file, the accounts have been settled but if I remember correctly they stay on file for 6 years. I really would like to have a second property but it's starting to look like it's not worth the hassle for what will be around £200pm after tax profit.

If they are satisified and more than two years old (the older the better) then there will be options available to you. As you'd expect, rates will slightly higher, the taxation saving of doing it jointly should far outweigh the difference in rates, I would have expected..............

[Fergie87]

Sarnie said:

Fergie87 said:

She does have defaults on her credit file, the accounts have been settled but if I remember correctly they stay on file for 6 years. I really would like to have a second property but it's starting to look like it's not worth the hassle for what will be around £200pm after tax profit.

If they are satisified and more than two years old (the older the better) then there will be options available to you. As you'd expect, rates will slightly higher, the taxation saving of doing it jointly should far outweigh the difference in rates, I would have expected..............

Thanks for the information I'll have a look into a joint mortgage and see if it is possible. I assumed it would be ruled out completely until 6 years after the default.

[Paul O]

Fergie87 said:

Do any of you have rental properties, if so have you managed to make it profitable?

Edited by Fergie87 on Monday 6th July 17:26

The only way I think it's profitable is if you either buy cheap (significantly under value), you can add value to a property (you are a dab hand at property renovation) or have faith and belief in a price growth spurt in the medium term.

If none of these apply, my experience is that the money you make might be slightly more (maybe) than an investment, but with added pain-in-the-ass of dealing with tenants and all the legal bits and pieces.

To avoid the tax, borrow as much as you can (smaller deposit), and make the rent only just cover the interest payments. Invest the rest. In 25 years, take out your profit from property increases - that's your investment 'profit' - although you'll still have to pay tax on that when you sell. Tax man always wins.

I've never been able to make property look any better financially than investments.

[daytona365]

200 per month maybe for next to no effort, also the place is still increasing at a rate, depending where it is ?.......Plus, when the mortgage is paid, you own it outright !!

[Countdown]

Fergie87 said:

I really would like to have a second property but it's starting to look like it's not worth the hassle for what will be around £200pm after tax profit. Do any of you have rental properties, if so have you managed to make it profitable?

When you say "£200pcm after tax profit" is that also after mortgage repayment?

In other words if you are also paying off £200pm of any mortgage then the net profit is really £400pcm.BTL is definitely worth doing if you have over £50k spare cash and you're a dab hand at DIY.

[oldnbold]

Paul O said:

The only way I think it's profitable is if you either buy cheap (significantly under value), you can add value to a property (you are a dab hand at property renovation) or have faith and belief in a price growth spurt in the medium term.

If none of these apply, my experience is that the money you make might be slightly more (maybe) than an investment, but with added pain-in-the-ass of dealing with tenants and all the legal bits and pieces.

To avoid the tax, borrow as much as you can (smaller deposit), and make the rent only just cover the interest payments. Invest the rest. In 25 years, take out your profit from property increases - that's your investment 'profit' - although you'll still have to pay tax on that when you sell. Tax man always wins.

I've never been able to make property look any better financially than investments.

That's not my experience.

My wife and I are getting a double digit net return (after all expences and tax) on the cash that we injected into our small portfollio.

Obviously there is also an amount of capital growth, currently about 25% over the 4 year period that we have owned the properties. Just remorgaged so that figure is the lenders valuation not mine.

Agents run all of the properties so no real arse pain incured. I know nothing about investments but would be interested to learn of any low risk products that could match or come close to our property income as I still have some cash to invest and I am probably heading towards another BTL.

I should add that we were both able to retire early because of the property income and therefore use our personal tax allowances against the property income, which certainly helps us considerably.

[Fergie87]

Countdown said:

Fergie87 said:

I really would like to have a second property but it's starting to look like it's not worth the hassle for what will be around £200pm after tax profit. Do any of you have rental properties, if so have you managed to make it profitable?

When you say "£200pcm after tax profit" is that also after mortgage repayment?

In other words if you are also paying off £200pm of any mortgage then the net profit is really £400pcm.BTL is definitely worth doing if you have over £50k spare cash and you're a dab hand at DIY.

That's just an interest only mortgage, I spoke to a mortgage advisor and he said most people go for interest only and bank the cash while waiting for the house to appreciate and gain equity then sell or remortgage to buy another. The figures I am looking at are £850pcm rent with the interest only mortgage being £275. That leaves me with £575 of which I would lose 40% to tax that leaves me with £230. I was told that arrangement fees, property management and maintenance can be claimed back on tax.

If I was to try and pay the mortgage it would leave me out of pocket each month. I was willing to do this but was advised not to.

I have no problems where DIY is concerned I completely renovated our house myself and have all tools needed available to me.

Edited by Fergie87 on Monday 6th July 22:48

[Countdown]

£575 less 40% tax is £345

[Fergie87]

Countdown said:

£575 less 40% tax is £345

So it is, that's some bad maths on my part

[S6PNJ]

£575 less 1/12 of the initial let fees (for first rental tax year), less 1/12 of your annual insurance, less 1/12 of the Gas safety certificate, less 1/12 of the repairs etc. All this is taken off the gross income before you start looking at tax. The tax is only on the profit, not the income less mortgage. if you have a good accountant, you might never make a 'profit' as such so your tax liability is greatly reduced.

[Fergie87]

S6PNJ said:

£575 less 1/12 of the initial let fees (for first rental tax year), less 1/12 of your annual insurance, less 1/12 of the Gas safety certificate, less 1/12 of the repairs etc. All this is taken off the gross income before you start looking at tax. The tax is only on the profit, not the income less mortgage. if you have a good accountant, you might never make a 'profit' as such so your tax liability is greatly reduced.

I didn't realise pretty much every expenditure could be taken off tax. If we go ahead with this i definitely have to get an accountant. I'm assuming the accountants fee will also be written off against tax?

[S6PNJ]

Fergie87 said:

S6PNJ said:

£575 less 1/12 of the initial let fees (for first rental tax year), less 1/12 of your annual insurance, less 1/12 of the Gas safety certificate, less 1/12 of the repairs etc. All this is taken off the gross income before you start looking at tax. The tax is only on the profit, not the income less mortgage. if you have a good accountant, you might never make a 'profit' as such so your tax liability is greatly reduced.

I didn't realise pretty much every expenditure could be taken off tax. If we go ahead with this I definitely have to get an accountant. I'm assuming the accountants fee will also be written off against tax?

Yup, any expense (certain rules apply - no capital expenditure as that goes against CGT) can be 'written off' against the tax. You only pay tax on the 'final' annual profit.

[Jonsv8]

Op you seem unaware of quite a lot here. Think about time when the property in unoccupied and bills still need paying. Decorating costs from time go time. There seem to be more and more certificates that need doing, gas boiler has been one, electric isn't mandatory but letting agents push for it and there was another one recently about water. Then insurance still beds go be paid. If it's a flat then there are usually ground rent and maintenance charges. They're all expenses but they can add up.

People also usually go interest only as paying off the mortgage also means reducing the amount of interest paid which means more is taxable.

I've a buy to let as part of a mixed portfolio. Returns are very sensitive to occupancy rates, mortgage rates and increases in property value. Theyre also not a very liquid asset. Disposal can be difficult if you ever need to sell.

[-Pete-]

If I understand correctly, today's budget announcement limits your tax relief on BTL interest payments to 20%. This will be phased in from 2017 to 2020. That means once you exceed £42,385 taxable income, the ROI for BTL will be pants. That's £3K/month net income, per person, so whilst BTL can make sense as the only means of income for a couple, it's no longer going to work as a supplemental income for individuals with a decent salary from employment too, or other taxable income.