BTL mortgage and tax implications
Discussion
I would be grateful for any informed advice as to how I can best arrange the following.
House 1. Value £165k, no mortgage, currently rented out and returning £8060 per annum
House 2. Value £225k mortgage £30k, soon to be empty.
House 3. Mortgage £285k, 5.65% apr, main residence.
House 2 will be sold as soon as possible, about £50k kept back for improvements to house 3 and the balance paid of the house 3 mortgage, which will leave me with no mortgage on the rented house and a mortgage on my main residence. I pay tax on the all of the rent received from house 1, and the return doesn't justify keeping the property.
Can I:
1. Sell house 1 for market price with a sitting tenant?
2. Re-mortgage house 1 as a buy to let and use the proceeds to pay off my primary mortgage?
3. If I re-mortgage house 1, will the mortgage interest charges be allowable as a cost against the income received?
Any advice would be gratefully received.
House 1. Value £165k, no mortgage, currently rented out and returning £8060 per annum
House 2. Value £225k mortgage £30k, soon to be empty.
House 3. Mortgage £285k, 5.65% apr, main residence.
House 2 will be sold as soon as possible, about £50k kept back for improvements to house 3 and the balance paid of the house 3 mortgage, which will leave me with no mortgage on the rented house and a mortgage on my main residence. I pay tax on the all of the rent received from house 1, and the return doesn't justify keeping the property.
Can I:
1. Sell house 1 for market price with a sitting tenant?
2. Re-mortgage house 1 as a buy to let and use the proceeds to pay off my primary mortgage?
3. If I re-mortgage house 1, will the mortgage interest charges be allowable as a cost against the income received?
Any advice would be gratefully received.
Eric Mc said:
Why would you need to remortgage House 1 if you currently own it outright|?
Because all of the rental income is taxable, without a mortgage I have no costs to offset against it. If I had a mortgage on house 1 it would reduce the profit from £8k to zero, if such was allowable.The whole ethos behind allowability of Interest as a deduction against taxable income is that the interest must arise on borrowings which have been incurred for an allowable purpose.
What would the "allowable purpose" be for these new borrowings be?
The borrowings could not be in respect of the property being used as "security" for the mortgage as the new mortgage is not for the purpose of buying House 1. That implies that the Interest arising cannot be offset against the Rent from House 1.
Merely taking out a loan and creating some loan interest does not mean that the interest can be offset against taxable income.
What would the "allowable purpose" be for these new borrowings be?
The borrowings could not be in respect of the property being used as "security" for the mortgage as the new mortgage is not for the purpose of buying House 1. That implies that the Interest arising cannot be offset against the Rent from House 1.
Merely taking out a loan and creating some loan interest does not mean that the interest can be offset against taxable income.
Edited by Eric Mc on Monday 25th June 12:35
There must be a way of taking some equity from house 1 without selling, at present pretty much all of the rental income is taxable. What if I sold house 1 to my pension fund? Or to my wife? There may then be some capital gains implications and the inevitable stamp duty (unless I sold really cheap...). Somehow, I have ended up with a mortgage on the wrong house!
If you "sold" House 1 "cheap", the Revenue would not accept the figures as being genuine as they would deem the house to have been sold at less than market value. If this happens, the Revenue appoint a District Valuer to place the correct valuation on the disposal of the property and recalculate any Capital Gains arising.
Why do you need to release equity from House 1?
If you are doing it to provide funds to enable you to "live" - that is not one of the "allowable" categories for the tax deductability of loan interest.
Why do you need to release equity from House 1?
If you are doing it to provide funds to enable you to "live" - that is not one of the "allowable" categories for the tax deductability of loan interest.
Eric Mc said:
If you "sold" House 1 "cheap", the Revenue would not accept the figures as being genuine as they would deem the house to have been sold at less than market value. If this happens, the Revenue appoint a District Valuer to place the correct valuation on the disposal of the property and recalculate any Capital Gains arising.
Why do you need to release equity from House 1?
If you are doing it to provide funds to enable you to "live" - that is not one of the "allowable" categories for the tax deductability of loan interest.
I don't 'need' to do anything. Ideally, I would have no mortgage on my main residence and pay no tax on the income from the rented property. If I could sell the rented property I would, but the tenant is showing no signs of moving out and I am unsure as to whether it makes sense to sell with a tenant in place.Why do you need to release equity from House 1?
If you are doing it to provide funds to enable you to "live" - that is not one of the "allowable" categories for the tax deductability of loan interest.
Fag packet figures work as follows:
House 1, value £165k, rental income £8060, after tax maybe £5k/£6k.
Cost of £165k worth of main mortgage = about £9.3k.
Chance of significant capital appreciation of house 1 = zero (in my opinion, I don't want to debate it).
If house 1 had a mortgage it would show a loss, without a mortgage it shows a profit and I pay tax on said profit. This profit assumes no cost of capital, whereas there is actually a cost to me albeit on the wrong house.
Dick D - Don't let Gordon (or his succesor) find out.
The allowable borrowing categories are -
loan to finance a rented out property (buy to let)
loan to buy a share in a partnership or introduce capital into a partnership
loan to buy shares in a limited company or to lend money to a limited company (subject to lots of restrictions)
loan to buy plant and machinery in a partnership
loan to pay Inheritance Tax
loan to acquire shares in an employee controlled trading company
loan to buy shares in a co-operative
As a general rule, businesses can claim loan interest on borrowing taken out to buy assets for the purpose of the trading actvivty of the business.
As you can see, the "purpose" of the loan is the key factor.
Taking out loans merely to try and reduce tax bills won't wash with the Revenue.
David S - you need some specialist advice on whatever options may be open to you.
Any "sale" of the property will probably result in a Capital Gain - although whether any tax arises on that gain will be determined by a number of factors -
the size of the gain
the length of time you've had the property
whether you've ever lived in the property
whether it is in joint names
The allowable borrowing categories are -
loan to finance a rented out property (buy to let)
loan to buy a share in a partnership or introduce capital into a partnership
loan to buy shares in a limited company or to lend money to a limited company (subject to lots of restrictions)
loan to buy plant and machinery in a partnership
loan to pay Inheritance Tax
loan to acquire shares in an employee controlled trading company
loan to buy shares in a co-operative
As a general rule, businesses can claim loan interest on borrowing taken out to buy assets for the purpose of the trading actvivty of the business.
As you can see, the "purpose" of the loan is the key factor.
Taking out loans merely to try and reduce tax bills won't wash with the Revenue.
David S - you need some specialist advice on whatever options may be open to you.
Any "sale" of the property will probably result in a Capital Gain - although whether any tax arises on that gain will be determined by a number of factors -
the size of the gain
the length of time you've had the property
whether you've ever lived in the property
whether it is in joint names
Edited by Eric Mc on Monday 25th June 13:23
Would it make financial sense to sell the property to a separate limited company which would finance the purchase with a loan(Bearing in mind I already own 1 ltd co)?
There has got to be at least one half legit way to do what I want...
Someone?
Edited to add:
I've already run the capital gains implication past my accountant and he doesn't think there will be much to pay, the house is owned jointly and we lived there before letting it out. It isn't CGT that is my main concern.
There has got to be at least one half legit way to do what I want...
Someone?
Edited to add:
I've already run the capital gains implication past my accountant and he doesn't think there will be much to pay, the house is owned jointly and we lived there before letting it out. It isn't CGT that is my main concern.
Edited by David_s on Monday 25th June 13:33
If a company bought the property - the COMPANY should be able to offset any loan interest on ITS borrowings against ITS rental income.
Obviously, the rental income would now be going into a company and would be subject to Corporation Tax rather than personal Income Tax.
The problem arises when you, as an individual, try to extract any money from the company. That income would be subject to Income Tax and possibly National Insurance as well.
However, there are ways of mitigating the tax impacts of withdrawls from your own company.
One thing you have to watch out for is that limited companies which derive the bulk of their income from rented properties are deemed to by "Investment Companies" rather than "Trading Companies" and cannot avail of the lower rates of Corporation Tax that small trading companies can avail of. Also, they operate under a more onerous reporting and disclosure regime for Companies Act purposes.
Obviously, the rental income would now be going into a company and would be subject to Corporation Tax rather than personal Income Tax.
The problem arises when you, as an individual, try to extract any money from the company. That income would be subject to Income Tax and possibly National Insurance as well.
However, there are ways of mitigating the tax impacts of withdrawls from your own company.
One thing you have to watch out for is that limited companies which derive the bulk of their income from rented properties are deemed to by "Investment Companies" rather than "Trading Companies" and cannot avail of the lower rates of Corporation Tax that small trading companies can avail of. Also, they operate under a more onerous reporting and disclosure regime for Companies Act purposes.
Eric Mc said:
If a company bought the property - the COMPANY should be able to offset any loan interest on ITS borrowings against ITS rental income.
Obviously, the rental income would now be going into a company and would be subject to Corporation Tax rather than personal Income Tax.
The problem arises when you, as an individual, try to extract any money from the company. That income would be subject to Income Tax and possibly National Insurance as well.
However, there are ways of mitigating the tax impacts of withdrawls from your own company.
One thing you have to watch out for is that limited companies which derive the bulk of their income from rented properties are deemed to by "Investment Companies" rather than "Trading Companies" and cannot avail of the lower rates of Corporation Tax that small trading companies can avail of. Also, they operate under a more onerous reporting and disclosure regime for Companies Act purposes.
I don't think there will be any profit to take! Will there be any implications concerning associated companies and dividing the lower rate of Corporation Tax allowance between the two? I bought a commercial property last year for the main business to trade from and my accountant advised against setting up a separate company to own the property for this reason (I think)? Obviously, the rental income would now be going into a company and would be subject to Corporation Tax rather than personal Income Tax.
The problem arises when you, as an individual, try to extract any money from the company. That income would be subject to Income Tax and possibly National Insurance as well.
However, there are ways of mitigating the tax impacts of withdrawls from your own company.
One thing you have to watch out for is that limited companies which derive the bulk of their income from rented properties are deemed to by "Investment Companies" rather than "Trading Companies" and cannot avail of the lower rates of Corporation Tax that small trading companies can avail of. Also, they operate under a more onerous reporting and disclosure regime for Companies Act purposes.
David_s said:
I
1. Sell house 1 for market price with a sitting tenant?
Any advice would be gratefully received.
sorry cant help you on most parts but one the small part of talking about tenants, if they have a tenancy agreement then they are not 'sitting tenants'. Sitting tenants will affect the value of your property. A normal let to tenants on a 6mths tenancy should not. 1. Sell house 1 for market price with a sitting tenant?
Any advice would be gratefully received.
Just to get the terminoligy right..
superlightr said:
David_s said:
I
1. Sell house 1 for market price with a sitting tenant?
Any advice would be gratefully received.
sorry cant help you on most parts but one the small part of talking about tenants, if they have a tenancy agreement then they are not 'sitting tenants'. Sitting tenants will affect the value of your property. A normal let to tenants on a 6mths tenancy should not. 1. Sell house 1 for market price with a sitting tenant?
Any advice would be gratefully received.
Just to get the terminoligy right..
Your accountant is correct in that having more than one company can dilute the various bands which go towards working how much profit is taxable at the low small trading company rates.
I would go back to your accountant and discuss your overall concerns with him.
He probably wouldn't appreciate too much, people like me giving you free advice over an Internet forum. I do have to be careful (for professional reasons) what I say in these general discussions - especially when the person with the query already has a professional advisor on board.
I would go back to your accountant and discuss your overall concerns with him.
He probably wouldn't appreciate too much, people like me giving you free advice over an Internet forum. I do have to be careful (for professional reasons) what I say in these general discussions - especially when the person with the query already has a professional advisor on board.
Eric Mc said:
Your accountant is correct in that having more than one company can dilute the various bands which go towards working how much profit is taxable at the low small trading company rates.
I would go back to your accountant and discuss your overall concerns with him.
He probably wouldn't appreciate too much, people like me giving you free advice over an Internet forum. I do have to be careful (for professional reasons) what I say in these general discussions - especially when the person with the query already has a professional advisor on board.
Thanks for you input, it is appreciated.I would go back to your accountant and discuss your overall concerns with him.
He probably wouldn't appreciate too much, people like me giving you free advice over an Internet forum. I do have to be careful (for professional reasons) what I say in these general discussions - especially when the person with the query already has a professional advisor on board.
Nett profit through the main company is anwhere between £15k and £40k per month and growing, I don't want to split my small company allowance and end up paying CT at 30% in the next few years just to save a few thousand pounds in personal taxation costs.
I find that having a bit of knowledge before speaking to my accountant helps, otherwise he tends to only give text book answers and I am usually prepared to take slightly riskier decisions.
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