Buy-to-let mortgages and tax

davejuk_2

I hope this is a relatively simple question...

I'll use a simple example:

I buy a house for £160k with a £40k deposit on a 5% fixed rate mortgage. I rent it out at £1,100/month for 5 years. At the end of the 5 years I sell it for £190k.

1.) Do I only pay Income Tax each year on the rent I receive (£13,200) minus interest on the mortgage (~£6,000)? i.e. £7,200

2.) Do I pay a flat 18% Capital Gains Tax on the £30k profit (£190k-£160k) I made on the purchase/sale of the property?

3.) Obviously I understand that there will be other expenses, some of which will be tax deductable, but are there any other taxes I would be required to pay?

4.) Would I reduce my tax liability by registering a company and giving it ownership of the property and the mortgage?

Gorgeous_George

I buy a house for £160k with a £40k deposit on a 5% fixed rate mortgage. I rent it out at £1,100/month for 5 years. At the end of the 5 years I sell it for £190k.

1.) Do I only pay Income Tax each year on the rent I receive (£13,200) minus interest on the mortgage (~£6,000)? i.e. £7,200

Yes but there are other expenses that can be offset against tax.

2.) Do I pay a flat 18% Capital Gains Tax on the £30k profit (£190k-£160k) I made on the purchase/sale of the property?

Yes but you have an annual CGT allowance (currently £9,200) per person.

3.) Obviously I understand that there will be other expenses, some of which will be tax deductable, but are there any other taxes I would be required to pay?

Council tax if the property is empty (usually only if over six months).

4.) Would I reduce my tax liability by registering a company and giving it ownership of the property and the mortgage?[/quote]

Probably but I don't know.

GG

brit1234

davejuk wrote: »

I hope this is a relatively simple question...

I'll use a simple example:

I buy a house for £160k with a £40k deposit on a 5% fixed rate mortgage. I rent it out at £1,100/month for 5 years. At the end of the 5 years I sell it for £190k.

1.) Do I only pay Income Tax each year on the rent I receive (£13,200) minus interest on the mortgage (~£6,000)? i.e. £7,200

2.) Do I pay a flat 18% Capital Gains Tax on the £30k profit (£190k-£160k) I made on the purchase/sale of the property?

3.) Obviously I understand that there will be other expenses, some of which will be tax deductable, but are there any other taxes I would be required to pay?

4.) Would I reduce my tax liability by registering a company and giving it ownership of the property and the mortgage?

Simple you have to pay income tax on any profit from the rent, however you can claim that back through other expences to do with the house such as maintance etc.

Then you are unlikely to pay Capital gains tax as well. In 5 years time your property would of gone down in value say 50% or more if newbuild thus you won't need to pay capital gains as you have not made any gains but a loss.

You may have to pay capital gains say in 10-15 years where any profit with have a 18% tax on it as property prices slowly recover. As a property investor you are in it for the long haul so shouldn't make a difference especially as you should be focusing on a good rental yeild rather than capital growth.

Gorgeous_George

You do not claim tax back.

You pay tax on the profit - all of the profit. The profit is calculated by adding up the income (rent) and subtracting the costs (interest, wear and tear if furnished, travel, etc.). It is quite easy.

CGT is paid if you make a capital gain. As I said, it is 18% at the moment but you have a CGT allowance. You don't pay CGT on losses - there's a clue in the name.

GG

dunstonh

You can offset the losses on another asset sold in the same tax year which can be worth doing at times. Even if its a form of delayed bed and breakfasting.

For example, someone selling a property with a £20,000 gain could sell some unit trusts now at a loss but then rebuy the unit trusts back again (different funds or wait until after 30 days to buy them back) and then offset the loss on the unit trusts against the gain.

Also, hoping for a gain in 5 years is optimistic. Anything can happen but the last house price crash saw a period of upto 11 years in some areas between peak and break even point after the crash. This one could be more it could be less but you would be banking on a much much shorter one this time round for you to get those figures.

SouthCoast

As you will be running a business advice from HMR&C.

http://www.hmrc.gov.uk/startingup/index.htm

RainMaker_2

davejuk wrote: »

4.) Would I reduce my tax liability by registering a company and giving it ownership of the property and the mortgage?

It depends on your personal circumstances. At best the tax savings would be small and quite likely wiped out by the cost of administering a LTD Co.

silvercar

Government advice on tax and record keeping for landlords:

http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnPropertyAndRentalIncome/DG_4017814