Tax and let property
Discussion
Not sure if this is best here or in homes section, but I'll start here. Anyway, scenario I have is one BTL had it for 7 years and title and mortgage is in my name. I've always declared income on SA and it hasn't been an issue because the gap between interest and rent has been low, hence minimal tax. It's now opening up and I face a bigger tax bill in future unless I do something.
This is compounded by the fact I now have another property, inherited and at present with title in my name, no mortgage, which I intend to let.
Any views on the most tax efficient solution - I may also add another property in the next 2 years. I am higher rate tax payer, however, wife does not work, hence pays no tax at present.
Should we put in joint names ? Shoud I / could I pay a wage to my wife as part of a business ? Set up a LTD company ? ANy other legitimate ways to reduce tax liability. I do need to think about the costs of changing property titles and mortgage names etc...
I do intend to take a mortgage on the inheritied prop - may be relevant ?
any thoughts welcomed.
This is compounded by the fact I now have another property, inherited and at present with title in my name, no mortgage, which I intend to let.
Any views on the most tax efficient solution - I may also add another property in the next 2 years. I am higher rate tax payer, however, wife does not work, hence pays no tax at present.
Should we put in joint names ? Shoud I / could I pay a wage to my wife as part of a business ? Set up a LTD company ? ANy other legitimate ways to reduce tax liability. I do need to think about the costs of changing property titles and mortgage names etc...
I do intend to take a mortgage on the inheritied prop - may be relevant ?
any thoughts welcomed.
You prepare a single set of rental accounts for each property.
Once the income and expenditure account has been prepared for each property, you then halve the figures and enter these halved values in the respective individual's tax return.
So, if Property 1 had (say) Gross Rents of £10,000, Mortgage Interest of £4,000 and Insurance of £500 - giving you a rental profit of £5,500, you would show these figures on each individual's tax return as follows -
Gross Rent - £5,000
Interest - £2,000
Insurance - £250
Rental Profit - £2,750
Once the income and expenditure account has been prepared for each property, you then halve the figures and enter these halved values in the respective individual's tax return.
So, if Property 1 had (say) Gross Rents of £10,000, Mortgage Interest of £4,000 and Insurance of £500 - giving you a rental profit of £5,500, you would show these figures on each individual's tax return as follows -
Gross Rent - £5,000
Interest - £2,000
Insurance - £250
Rental Profit - £2,750
Remortgage the BTL properties to negate the taxable income from them. Then use the withdrawn equity to reduce the mortgage on the house you live in so your overall outgoings aren't increased. Obviously, the more BTL properties you have the larger house you'll need as your primary residence for this to continue working.
MitchT said:
Remortgage the BTL properties to negate the taxable income from them. Then use the withdrawn equity to reduce the mortgage on the house you live in so your overall outgoings aren't increased. Obviously, the more BTL properties you have the larger house you'll need as your primary residence for this to continue working.
How does this work exactly, can you give an example? So there is no tax implication with releasing equity from a BTL - tax liability only arises from rental profit or sale of the property itself? Sideways Rich said:
How does this work exactly, can you give an example? So there is no tax implication with releasing equity from a BTL - tax liability only arises from rental profit or sale of the property itself?
I believe any house that isn't your primary residence will incur CGT when it's sold so it's a good question. I know about this as a fiend of mine has three BTLs and lives in a huge detached house which he pays down more and more with releases from his BTLs, but I don't know what the ins and outs are. I'll have to ask him next time I see him how the business of potential CGT is dealt with. He has his BTLs on interest only as you can't offset capital repayments and aims to keep his mortgage payments as high as the rental income to avoid income tax, but I guess there'd be CGT to pay on the equity gained when each of the properties is eventually sold, whatever he might have done with that equity. Perhaps he's just going to keep the houses his whole life and use them as 'cash cows' to fund his lifestyle with the CGT to become his estate's problem after he's gone. I don't know.Sideways Rich said:
How does this work exactly, can you give an example? So there is no tax implication with releasing equity from a BTL - tax liability only arises from rental profit or sale of the property itself?
It works if you have a mortgage on your own house. Go and borrow on the BTL, any interest will be tax deductible, and use the proceeds to repay the home mortgage. Economically it works if the interest cost on the house is equal to or more than the interest (after tax) on the BTL. So therefore depends on the delta in interest rates. The sale of the BTL's will be taxable (with or without a mortgage), so it has no impact on the eventual capital gains position.
You're effectively turning non deductible interest (on the main house) into deductible interest (on the BTL).
Alpinestars said:
Not really. Perfectly sensible planning. Nothing in law to stop someone borrowing to fund a business.
I think Eric's point is that a "business" is increasing it's costs and reducing its tax contribution to fund an asset that would normally be funded from post-tax income.Eleven said:
I think Eric's point is that a "business" is increasing it's costs and reducing its tax contribution to fund an asset that would normally be funded from post-tax income.
Which is exactly what I said a few posts ago. Doesn't make it illegal! It's legitimate and sensible planning. Alpinestars said:
Which is exactly what I said a few posts ago. Doesn't make it illegal! It's legitimate and sensible planning.
Nobody mentioned illegality.It's a tax avoidance measure - which implies "legality". However, I think HMRC could, if they were bothered, challenge these types of arrangements.
HMRC will sometimes seek to block a tax avoidance move, even if it has in the past been interpreted as being within the rules.
That's the game both sides play.
Eric Mc said:
Nobody mentioned illegality.
It's a tax avoidance measure - which implies "legality". However, I think HMRC could, if they were bothered, challenge these types of arrangements.
HMRC will sometimes seek to block a tax avoidance move, even if it has in the past been interpreted as being within the rules.
That's the game both sides play.
It is. But they can't willy nilly successfully challenge something because they don't like it. It requires a change of law. It's no different in spirit to funding a company with shareholder debt, taking out a loan to fund a partnership interest etc etc. It's a tax avoidance measure - which implies "legality". However, I think HMRC could, if they were bothered, challenge these types of arrangements.
HMRC will sometimes seek to block a tax avoidance move, even if it has in the past been interpreted as being within the rules.
That's the game both sides play.
Sorry, let me get this straight.
We all know you have to pay tax on the profit of a BTL. So, if I rent the house for £1,500pcm but pay £1,000pcm I'd have to pay tax on £6,000 a year (assuming no other expenses).
However, if the interest portion of the mortgage on the home I currently live in is £500pcm in effect I claim both sets of interest (£1,000 + £500) so have a 'profit' of zero so in effect pay no tax (on this portion of my income).
Assuming so far my understanding is correct, that means I could potentially make a 'loss' overall?
(The above is assuming the repayments are interest, not capital repayments)
We all know you have to pay tax on the profit of a BTL. So, if I rent the house for £1,500pcm but pay £1,000pcm I'd have to pay tax on £6,000 a year (assuming no other expenses).
However, if the interest portion of the mortgage on the home I currently live in is £500pcm in effect I claim both sets of interest (£1,000 + £500) so have a 'profit' of zero so in effect pay no tax (on this portion of my income).
Assuming so far my understanding is correct, that means I could potentially make a 'loss' overall?
(The above is assuming the repayments are interest, not capital repayments)
Eric, there is no support in law for your position. Unless I've missed something
Moose, no that's not how it works. Your loan has to be in respect of the BTL. You cannot allocate interest from your residence to your BTL. The limiting factor will often be the amount lenders are willing to lend on a BTL. Most have cash flow tests, so in theory it's difficult to make a loss when comparing rents to interest.
Moose, no that's not how it works. Your loan has to be in respect of the BTL. You cannot allocate interest from your residence to your BTL. The limiting factor will often be the amount lenders are willing to lend on a BTL. Most have cash flow tests, so in theory it's difficult to make a loss when comparing rents to interest.
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