Tax on BTL

[supercommuter]

Looking at a low value buy to let up north. £100k value. £50k deposit / £50k mortgage

Both me and my wife work. I am a higher rate tax payer, she is lower rate.

What is the most tax efficient way of receiving the rent? If I pay 45 percent tax on the rent I will be making a loss.

That said we do not 'need' the rental income at the moment and would happily cover the mortgage payments if the rent was accumulating somewhere it got taxed less (ltd company?)

Or is my only option to put the property in my wifes name and pay 20 percent on the rental income?

Thanks

[Eric Mc]

How can paying 45% tax on the rental profit from this property suddenly cause you to make a loss?

Taxpayers pay tax on the PROFITS generated by a rental property. They are not taxed on the Gross Rental Income.

However, have you taken into account future Capital Gains Tax when the property is eventually disposed of?

[NickCQ]

Eric Mc said:

How can paying 45% tax on the rental profit from this property suddenly cause you to make a loss?

Because the mortgage interest is no longer deductible, I thought? However you could be in a situation where you make a profit after tax but are cashflow negative due to the mortgage amortisation.

[SunsetZed]

Eric Mc said:

How can paying 45% tax on the rental profit from this property suddenly cause you to make a loss?

Taxpayers pay tax on the PROFITS generated by a rental property. They are not taxed on the Gross Rental Income.

However, have you taken into account future Capital Gains Tax when the property is eventually disposed of?

Not for long Eric, soon mortgage interest will not be an allowable cost for a taxpayer.

[supercommuter]

Eric Mc said:

How can paying 45% tax on the rental profit from this property suddenly cause you to make a loss?

Taxpayers pay tax on the PROFITS generated by a rental property. They are not taxed on the Gross Rental Income.

However, have you taken into account future Capital Gains Tax when the property is eventually disposed of?

I thought I would pay tax on the gross rental income, but I could get some relief of the interest of the mortgage.

For arguments sake:

Rental for Property - £500 per month
Mortgage for Property - £250 per month
Repairs - £50 per month

So that is £6000 gross and £3600 outgoing. Would I pay 45 percent tax on the remaining £2400?

Sorry, I do not own any rental properties at the moment. All of my savings are in funds and ISAs.

[uknick]

SunsetZed said:

Not for long Eric, soon mortgage interest will not be an allowable cost for a taxpayer.

Not correct at all. But, if you read the various posts/newspaper articles when the change was announced it was easy to assume tax relief was being removed all together.

What is changing is tax relief on mortgage interest will be limited to basic rate tax, 20% at present, when we reach April 2020. Up to then there is taper relief to bring the 40% down to 20%.

A basic rate tax payer will pay no extra tax on the profits.

[GR_TVR]

supercommuter said:

I thought I would pay tax on the gross rental income, but I could get some relief of the interest of the mortgage.

For arguments sake:

Rental for Property - £500 per month
Mortgage for Property - £250 per month
Repairs - £50 per month

So that is £6000 gross and £3600 outgoing. Would I pay 45 percent tax on the remaining £2400?

Sorry, I do not own any rental properties at the moment. All of my savings are in funds and ISAs.

I am by no means an expert on BTL, but this is how I believe it will work out for you based on those figures above:

Rental income - £6,000
Mortgage interest - £3,000
Deductable costs - £600

Profit before tax - £2,400
Taxable profit - £5,400
45% tax - £2,430
Less 20% tax relief - (£600)
Total tax due - £1,830
Net profit - £570

This is from 2020 onwards, it is being tapered in over the next 3 years (75/50/25/0% interest relief)

For a basic rate taxpayer the net profit in the above example would be £1,920 - however the full rental income is added to their salary, so it's quite easy for this to push them into a higher tax bracket, so be wary of this.

I'm not quite sure on the ltd company front, hopefully someone can comment further.


P.S. Don't take the above as gospel, this is only my understanding on the situation!

[liner33]

In the OP's case its possible the tax liability could be split between husband and wife

[mcbook]

There are some really nice worked examples of this on the HMRC pages... have a look here

https://www.gov.uk/guidance/changes-to-tax-relief-...

[uknick]

supercommuter said:

I thought I would pay tax on the gross rental income, but I could get some relief of the interest of the mortgage.

For arguments sake:

Rental for Property - £500 per month
Mortgage for Property - £250 per month
Repairs - £50 per month

So that is £6000 gross and £3600 outgoing. Would I pay 45 percent tax on the remaining £2400?

Sorry, I do not own any rental properties at the moment. All of my savings are in funds and ISAs.

As Eric said you pay 45% tax on the net profit. However, due to the change in how much mortgage interest can be deducted it is not quite so simple these days.

It'll look something like this; (excuse the formatting)

......................................pre 2017....2017-18...2018-19.....2019-20....2020-21
rental income...................£6,000.......£6,000.....£6,000.......£6,000......£6,000
expenses...........................-£600.........-£600.......-£600........-£600........-£600
interest............................-£3,000......-£2,250....-£1,500........-£750.............£0
profit before tax................£2,400.......£3,150......£3,900......£4,650......£5,400
tax @ 45%......................-£1,080......-£1,418.....-£1,755.....-£2,093.....-£2,430
net profit...........................£1,320.......£1,733......£2,145.....-£2,558.......£2,970
remaining interest..............-£750......-£1,500.....-£2,250.....-£3,000
plus tax relief at 20%..........£150..........£300..........£450.. ......£600
Final profit........................£1,320.......£1,133..........£945 .........£758.........£570

So in effect you pay an extra £750 per year in tax from April 2020

[supercommuter]

uknick said:

supercommuter said:

I thought I would pay tax on the gross rental income, but I could get some relief of the interest of the mortgage.

For arguments sake:

Rental for Property - £500 per month
Mortgage for Property - £250 per month
Repairs - £50 per month

So that is £6000 gross and £3600 outgoing. Would I pay 45 percent tax on the remaining £2400?

Sorry, I do not own any rental properties at the moment. All of my savings are in funds and ISAs.

As Eric said you pay 45% tax on the net profit. However, due to the change in how much mortgage interest can be deducted it is not quite so simple these days.

It'll look something like this; (excuse the formatting)

......................................pre 2017....2017-18...2018-19.....2019-20....2020-21
rental income...................£6,000.......£6,000.....£6,000.......£6,000......£6,000
expenses...........................-£600.........-£600.......-£600........-£600........-£600
interest............................-£3,000......-£2,250....-£1,500........-£750.............£0
profit before tax................£2,400.......£3,150......£3,900......£4,650......£5,400
tax @ 45%......................-£1,080......-£1,418.....-£1,755.....-£2,093.....-£2,430
net profit...........................£1,320.......£1,733......£2,145.....-£2,558.......£2,970
remaining interest..............-£750......-£1,500.....-£2,250.....-£3,000
plus tax relief at 20%..........£150..........£300..........£450.. ......£600
Final profit........................£1,320.......£1,133..........£945 .........£758.........£570

So in effect you pay an extra £750 per year in tax from April 2020

Then I assume CGT on any profit made on the property when i sell it?

Well...what a load of st. Ideas of grandeur as a property mogul have now shrivelled. The hassle that would then come with having tenants and having to manage it from a distance it is not worth it.

I was hoping I could set up a ltd company, lend the company 50k and then somehow secure a mortgage in the company name. It was for retirement savings so I do not want the income now. Sounds like it is more hassle then its worth!

[SantaBarbara]

Are you planning to let it unfurnished?

[supercommuter]

SantaBarbara said:

Are you planning to let it unfurnished?

I had not got that far into it. Are there tax implications either way?

[uknick]

supercommuter said:

Then I assume CGT on any profit made on the property when i sell it?

Well...what a load of st. Ideas of grandeur as a property mogul have now shrivelled. The hassle that would then come with having tenants and having to manage it from a distance it is not worth it.

I was hoping I could set up a ltd company, lend the company 50k and then somehow secure a mortgage in the company name. It was for retirement savings so I do not want the income now. Sounds like it is more hassle then its worth!

If you're looking at it as a long a long term investment, you need to look at it in a different light.

If you're pretty sure the property will increase in value, then the rental income could be seen as a way of subsiding your buying/mortgage costs. Of course, if it's worth the hassle is another question.

The CGT when you dispose of the property will be taxed at 28%, if you remain a higher or highest rate tax payer; 18% if you are a basic rate tax payer.

If you do it all through a limited company you only pay corporation tax rates, which are at 19% at present. Plus, you can currently take up to £5k per year in dividends from the profits tax free.

[liner33]

If you use a interest only mortgage you would only be paying around £125 pm for £50k, of course whether that is suitable depends on what your long term plans are

[SantaBarbara]

Then there. Is the fee which letting agents demand

[Liggle]

I looked at this very recently in the midlands, copied from my spreadsheet so please excuse the formatting:

Purchase Price £103,000.00
Deposit £25,750.00
Rental Income PCM £595.00
Rental Income PA £5,950.00

Initial Costs
Stamp Duty £3,090.00
Mortgage Fee £1,500.00
Conveyancing £800.00
Renovation £5,000.00
Total investment £36,140.00

Running costs Year 1
Mortgage PCM £150.00
Mortgage PA £1,800.00
Insurances PA £200.00
Agent Fees £476.00
Gas Inspection £50.00
Misc Maintenance £1,000.00
Running costs total £3,526.00

Rental Profit (Yr 1) £2,424.00
Rental Yield (Yr 1) 7%
Capital Gain % PA 0.00%
Capital Gain (Yr 1) £-
Value (Yr 1) £103,000.00
ROI (Yr 1) £2,424.00
ROI (Yr 1) 6.71%

The above assumes no capital gain in the first year, just rental yield. This was operating via a Ltd Company 'SPV' (50/50 shareholder with wife) and is pre-corporation tax @ 19%, much more tax efficient than doing it 'personally'.

In 2016 I had a much better return than 6.71% just from Index Funds/ETF's so decided to stick with the low hassle approach for now.

Edited by Liggle on Thursday 17th August 16:09

[supercommuter]

Liggle said:

I looked at this very recently in the midlands, copied from my spreadsheet so please excuse the formatting:

Purchase Price £103,000.00
Deposit £25,750.00
Rental Income PCM £595.00
Rental Income PA £5,950.00

Initial Costs
Stamp Duty £3,090.00
Mortgage Fee £1,500.00
Conveyancing £800.00
Renovation £5,000.00
Total investment £36,140.00

Running costs Year 1
Mortgage PCM £150.00
Mortgage PA £1,800.00
Insurances PA £200.00
Agent Fees £476.00
Gas Inspection £50.00
Misc Maintenance £1,000.00
Running costs total £3,526.00

Rental Profit (Yr 1) £2,424.00
Rental Yield (Yr 1) 7%
Capital Gain % PA 0.00%
Capital Gain (Yr 1) £-
Value (Yr 1) £103,000.00
ROI (Yr 1) £2,424.00
ROI (Yr 1) 6.71%

The above assumes no capital gain in the first year, just rental yield. This was operating via a Ltd Company 'SPV' (50/50 shareholder with wife) and is pre-corporation tax @ 19%, much more tax efficient than doing it 'personally'.

In 2016 I had a much better return than 6.71% just from Index Funds/ETF's so decided to stick with the low hassle approach for now.

Edited by Liggle on Thursday 17th August 16:09

Thanks, very helpful. As you say, I am currently getting more than that in funds.

Maybe in the future!

[Liggle]

supercommuter said:

Thanks, very helpful. As you say, I am currently getting more than that in funds.

Maybe in the future!

The capital growth would make a big difference, but its un-certain at the moment so I left it out

[drainbrain]

Want a fag packet method?

Take the gross achievable rent . R

Multiply by 65% . R x 65%

(note: 65% is for realists. Optimists use 70% and pessimists use 60%)

Subtract the mortgage cost . R x 65% - M

= Gross income for tax purposes.

So R x 65% - M - T = yours to spend.

Over a period of 5-10 years that may be surprisingly accurate.

Edited by drainbrain on Thursday 17th August 16:30