Is there an easy tax calculator for buy to lets?
Discussion
I am finally going to bite the bullet and buy a little project buy to let this year but i want to work out how much income i will make from it after mortgage and taxes.
I am a higher rate tax payer so will if my rental income is £1,000 per month is it as simple as saying i owe £400/450 a month in tax. I will have a £400 mortgage a month, is it possible to get tax relief so i only pay tax on the remaining £600/550 'profit'?
My other option is a ltd company i guess - then just pay the 20 percent corporate tax annually. I dont need the 'profit' as income so i would rather let it build up paying lower rate tax and the mortgage of and draw down for any repairs. Guessing i may struggle to get lending on a freshly opened LTD company.
I am a higher rate tax payer so will if my rental income is £1,000 per month is it as simple as saying i owe £400/450 a month in tax. I will have a £400 mortgage a month, is it possible to get tax relief so i only pay tax on the remaining £600/550 'profit'?
My other option is a ltd company i guess - then just pay the 20 percent corporate tax annually. I dont need the 'profit' as income so i would rather let it build up paying lower rate tax and the mortgage of and draw down for any repairs. Guessing i may struggle to get lending on a freshly opened LTD company.
Landlords can offset against their rental income all costs associated with running and managing the property -
that includes -
repairs,
maintenance,
statutory fees (fire safety etc),
insurance,
agent fees,
light and heat costs incurred by the landlord
council tax and water charges incurred by the landlord
accounting fees
advertising
legal costs (in respect of tenant related matters or renewals of leasehold if appropriate)
garden maintenance
ground rents
annual leasehold charges (if appropriate)
mortgage interest and finance charges
Note that only mortgage INTEREST can be claimed (not the full mortgage payment - unless it's an interest only mortgage of course)
There is a big HOWEVER regarding mortgage interest and finance charges. For the past three years, the government has been introducing increasing restrictions on the way these costs can be offset against the rental income.
Here's what HMRC says -
Who is likely to be affected
Individuals that receive rental income on residential property in the UK or elsewhere and incur finance costs (such as mortgage interest), excluding where the property meets all the criteria to be a furnished holiday letting.
General description of the measure
This measure will restrict relief for finance costs on residential properties to the basic rate of Income Tax. This will be introduced gradually from 6 April 2017.
Finance costs includes mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan.
Landlords are longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs.
Landlords will be able to obtain relief as follows:
in 2017 to 2018 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction
in 2018 to 2019, 50% finance costs deduction and 50% given as a basic rate tax reduction
in 2019 to 2020, 25% finance costs deduction and 75% given as a basic rate tax reduction
from 2020 to 2021 all financing costs incurred by a landlord will be given as a basic rate tax reduction
that includes -
repairs,
maintenance,
statutory fees (fire safety etc),
insurance,
agent fees,
light and heat costs incurred by the landlord
council tax and water charges incurred by the landlord
accounting fees
advertising
legal costs (in respect of tenant related matters or renewals of leasehold if appropriate)
garden maintenance
ground rents
annual leasehold charges (if appropriate)
mortgage interest and finance charges
Note that only mortgage INTEREST can be claimed (not the full mortgage payment - unless it's an interest only mortgage of course)
There is a big HOWEVER regarding mortgage interest and finance charges. For the past three years, the government has been introducing increasing restrictions on the way these costs can be offset against the rental income.
Here's what HMRC says -
Who is likely to be affected
Individuals that receive rental income on residential property in the UK or elsewhere and incur finance costs (such as mortgage interest), excluding where the property meets all the criteria to be a furnished holiday letting.
General description of the measure
This measure will restrict relief for finance costs on residential properties to the basic rate of Income Tax. This will be introduced gradually from 6 April 2017.
Finance costs includes mortgage interest, interest on loans to buy furnishings and fees incurred when taking out or repaying mortgages or loans. No relief is available for capital repayments of a mortgage or loan.
Landlords are longer be able to deduct all of their finance costs from their property income to arrive at their property profits. They will instead receive a basic rate reduction from their income tax liability for their finance costs.
Landlords will be able to obtain relief as follows:
in 2017 to 2018 the deduction from property income (as is currently allowed) will be restricted to 75% of finance costs, with the remaining 25% being available as a basic rate tax reduction
in 2018 to 2019, 50% finance costs deduction and 50% given as a basic rate tax reduction
in 2019 to 2020, 25% finance costs deduction and 75% given as a basic rate tax reduction
from 2020 to 2021 all financing costs incurred by a landlord will be given as a basic rate tax reduction
A mortgage cost of £400 a month implies borrowings of, say, £250,000. On the basis that you already own your home you'll be paying enhanced stamp duty on the BTL. You'll also be paying enhanced Capital Gains Tax when you sell. Eric has explained the effective restriction of tax relief to 20% but watch out for this bonus element as well -
You could be forced into a higher tax bracket because you’ll need to declare on your tax return the income that was used to pay the mortgage. This could push your total income into the higher (£50,000 in 2019-20) or additional-rate (£150,000) tax brackets, depending on your income from other sources. Similarly you need to keep an eye on the effective 60% marginal rate of income tax that kicks in just over £100,000 p.a. as the personal allowance is withdrawn.
IMO the current UK tax regime renders BTL a dead duck for new entrants as casual landlords.
You could be forced into a higher tax bracket because you’ll need to declare on your tax return the income that was used to pay the mortgage. This could push your total income into the higher (£50,000 in 2019-20) or additional-rate (£150,000) tax brackets, depending on your income from other sources. Similarly you need to keep an eye on the effective 60% marginal rate of income tax that kicks in just over £100,000 p.a. as the personal allowance is withdrawn.
IMO the current UK tax regime renders BTL a dead duck for new entrants as casual landlords.
rockin said:
IMO the current UK tax regime renders BTL a dead duck for new entrants as casual landlords.
This. I’ve got a few BTL properties that I’ve built up starting about 18 years ago, last purchase about 10 years ago. If I could go back in time I just wouldn’t bother. No guarantees of capital appreciation, the new tax implications etc and that’s before the aggravation of tenants and property maintenance. Put your money in a relatively safe fund (VG life strategy or such) and you’ll probably get better returns for much less stress. Just my 2p. Thanks for your detailed replies, it’s appreciated.
To be honest I am starting to think it’s not worth it. All of the properties I am looking at get me 4.5% - 6% yield before I even take tax into consideration. I’ve always liked the idea of owning a few BTLs and putting them in a trust for my family but it just doesn’t make sense. My cash will likely be better in trackers to be honest. I just like the idea of ‘bricks and mortar’.
To be honest I am starting to think it’s not worth it. All of the properties I am looking at get me 4.5% - 6% yield before I even take tax into consideration. I’ve always liked the idea of owning a few BTLs and putting them in a trust for my family but it just doesn’t make sense. My cash will likely be better in trackers to be honest. I just like the idea of ‘bricks and mortar’.
I've always liked the idea of a BTL but never done it. Maybe I'll regret it some day, but something that's swaying me away further from doing it is climate change. Some projections of 1.5m sea level rises in next 50 years put my residential home under water. Why would I want to own it then? Now, for sure, but on a long time horizon it does feel like pass the parcel a bit. Just something I think of, maybe it's daft to think that far ahead.
supercommuter said:
Thanks for your detailed replies, it’s appreciated.
To be honest I am starting to think it’s not worth it. All of the properties I am looking at get me 4.5% - 6% yield before I even take tax into consideration. I’ve always liked the idea of owning a few BTLs and putting them in a trust for my family but it just doesn’t make sense. My cash will likely be better in trackers to be honest. I just like the idea of ‘bricks and mortar’.
And we haven't even touched on the Capital Gains Tax aspects.To be honest I am starting to think it’s not worth it. All of the properties I am looking at get me 4.5% - 6% yield before I even take tax into consideration. I’ve always liked the idea of owning a few BTLs and putting them in a trust for my family but it just doesn’t make sense. My cash will likely be better in trackers to be honest. I just like the idea of ‘bricks and mortar’.
I got in to BTL 5 years ago with 2 properties. So far I've had a fairly easy ride with tenants and maintenance costs and I've managed a 3-4% net yield but only because i do everything myself and these days I'm a 20% tax payer. It was an opportunity to diversify; I already had SIPP's, DB pensions and ISA's.
Capital growth hasn't been startling but I would expect circa 20% if i sold now. Joint ownership with my wife means that providing we only sold one per year we'd probably avoid any CGT liability.
Would I consider BTL now (or add to the portfolio)? Not on your life. I would be maxxing out S&S ISA's etc. It really isn't worth all the grief (and as I said I've had a pretty easy time).
Capital growth hasn't been startling but I would expect circa 20% if i sold now. Joint ownership with my wife means that providing we only sold one per year we'd probably avoid any CGT liability.
Would I consider BTL now (or add to the portfolio)? Not on your life. I would be maxxing out S&S ISA's etc. It really isn't worth all the grief (and as I said I've had a pretty easy time).
BoRED S2upid said:
Eric Mc said:
And we haven't even touched on the Capital Gains Tax aspects.
Which are only relevant if the properties appreciated. A lot of areas haven’t seen increases for years. But many landlords stake a lot in the assumption that the property will appreciate.
supercommuter said:
Please expand 
Nope 
Das boss hast strictly verboten any further expansion of the portfolios. So there's to be no further expansion!! By order of The Fuhrer!!!
However.......all she's banned is NUMERICAL expansion (bless her), and zere are MANY vays ze expansion can continue. more, erm, subtly....
Groat said:
Nope
Das boss hast strictly verboten any further expansion of the portfolios. So there's to be no further expansion!! By order of The Fuhrer!!!
However.......all she's banned is NUMERICAL expansion (bless her), and zere are MANY vays ze expansion can continue. more, erm, subtly....
Surely there are no more slums in Scotland to buy? Das boss hast strictly verboten any further expansion of the portfolios. So there's to be no further expansion!! By order of The Fuhrer!!!
However.......all she's banned is NUMERICAL expansion (bless her), and zere are MANY vays ze expansion can continue. more, erm, subtly....
BoRED S2upid said:
Surely there are no more slums in Scotland to buy?
What....like THIS do you mean?:https://www.futurepropertyauctions.co.uk/property_...
Groat said:
BoRED S2upid said:
Surely there are no more slums in Scotland to buy?
What....like THIS do you mean?:https://www.futurepropertyauctions.co.uk/property_...
Groat said:
BoRED S2upid said:
Surely there are no more slums in Scotland to buy?
What....like THIS do you mean?:https://www.futurepropertyauctions.co.uk/property_...
supercommuter said:
Funnily enough I had been looking at buying something outright in Scotland but the income issue with tax dont go away sadly
So many btl misadventures seem to start with 'funnily' and end with 'sadly'.What I don't understand is what draws so many people to want to get into the letting business rather than any of the multitude of other often far less complicated businesses they could get involved in.
They seem to so often end disappointed or dissatisfied with the outcomes which they somehow then seem to attribute to the nature of the business they chose to get involved with. Whereas when the usual outcome occurs in almost any other business they seem much less inclined to blame their choice of venture.
Another strange one is the reaction to changes in the marketplace. Markets are ever changing, that's their nature. But it's a bit of an extreme reaction to quit the market rather than adapt to the changes. Of course there CAN be involvement-ending changes. For example it could be made illegal to rent property or offer property to rent. But, seriously, isn't someone who quits the letting business because the taxation of mortgage interest changes not just someone whose business plan isn't too flexible?
I don't recall MIRAS stopping as being much of a barrier to owning a home via mortgaging. Far more people own homes now than when MIRAS was in place.
Edited by Groat on Tuesday 18th February 16:52
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