Buy to Let Allowable Expenses?

anselld

Hi,
Considering a buy-to-let for various reasons I don't need to dwell on and I am trying to understand the Tax position on rental income.

I understand that rental income less expenses is taxable - fair enough. My question is what is allowable as an expense as far as Mortgage is concerned?

Possible scenarios ...
(1) I take out a buy-to-let mortgage on the property in question. Presumably all interest is allowable expense?

(2) I remortgage my own property and use the proceeds to invest in the buy-to-let? Will the tax man be broad minded enough to treat this as the same thing even though the money is raised on a different property?

(3) (getting trickier...) I invest my own capital from savings to buy the property for let. Can I "charge myself" a fair and reasonable interest rate (comparable with a mortgage rate) and treat this as an expense against letting?

Any help appreciated....; I actually want to do (2)

socrates

My advice is try LandlordZone.com

CLAPTON

1. yes thats OK to charge the interest

2. yes , up to the value of BTL

3. no (it would anyway make no sense, as you would have to pay tax on the interest you charge yourself!)

RainMaker_2

anselld wrote: »

(3) (getting trickier...) I invest my own capital from savings to buy the property for let. Can I "charge myself" a fair and reasonable interest rate (comparable with a mortgage rate) and treat this as an expense against letting?

No.

However, having invested your own savings to finance (or part finance) the BTL, you could at any time in the future re-mortgage the BTL to pay yourself back the capital that you had originally invested. The interest on this additional borrowing is an allowable expense.

anselld

CLAPTON wrote: »

1. yes thats OK to charge the interest

2. yes , up to the value of BTL

3. no (it would anyway make no sense, as you would have to pay tax on the interest you charge yourself!)

3 makes sense to me in that there is a "cost of capital" whether you borrow it or provide it yourself. In this cast the cost is the loss of (net) interest. Worst case, if the entire purchase was self funded you could offset nil cost and that seems unfair.

Anyway, seems like 2 is the best bet and presumably it therefore makes no sense to pay off any capital either.

I dare not ask how it would be treated if it were an offset mortgage :rolleyes:

CLAPTON

remember that the interest is only put against your tax (at 20% ) and you still have to pay the other 80% to the mortgage company

whether or not it's best to use your saving depends upon the interest rate you are charged on the mortgage and the interest rate you gain on your savings.

you need to work out the details.

clutton_2

get an accountant who specialises in property taxation affairs - the law and the way the IR interpret things are very complex re property - your taxation and allowances can depend on your other income as well

you need property advice before embarking on this new business - how you set it up can save you tax or - alternatively - cost you a fortune

anselld

Sound advice! I was just thinking the same, when I read ....
Allowable expenses ...


• accountant's fees



:-))

CLAPTON

Just in case you don't work out the details and assuming sensible parameters and all things beiong equal, the best result is funding from your savings
and paying off the capital makes lots of sense...

anselld

CLAPTON wrote: »

Just in case you don't work out the details and assuming sensible parameters and all things beiong equal, the best result is funding from your savings
and paying off the capital makes lots of sense...

To be honest that is still challenging the grey matter at the moment, but it does feel right intuitively. I will stick at it with the calculator. :rolleyes: Many thanks!!

real1314

anselld wrote: »

3 makes sense to me in that there is a "cost of capital" whether you borrow it or provide it yourself. In this cast the cost is the loss of (net) interest. Worst case, if the entire purchase was self funded you could offset nil cost and that seems unfair.

Ok, so the property company "borrows" £100k from you.
The interest is charged at 5% pa so the company pays you £5k per year.

The company can claim this £5k per year as a cost and does not have to pay 20% tax on this, saving the company £1k in tax.

You receive £5k per year and have to pay 20% tax, or £1k if you like.

There may well be ways to make such a system more advantageous depending on your personal tax rate and the rate the company would have to pay, but not via fag packet calculations and advice on here.