buy to let - saving on tax

irishno1

Hi,

If I am renting two buy to let properties would I have to pay less tax on rental income and capital gains tax when I go to sell if I set myself up as a company?

I presume cars etc could then be claimed as expenses and would this also reduce capital gains tax? Thanks

Swiss_Toni

Bump - Good question, we'd like to know the answer too...!

Ian_W

Don't know the answer myself but when someone asked a similar question on the Cutting Tax forum [where this should probably be] the answer I believe was no. Perhaps you should move it there.

Chrismaths

It all depends on your personal tax rates & future intentions - professional advice, or a property tax book might be the way to go, but here are some pointers.
If you set up a company, you would have to 'sell' the property to the company at fair market value, which if the property has increased in value will trigger a capital gains tax charge on you (unless you can claim Principal Private Residence relief - depends on if you have lived in the properties). Might also be stamp duty, but not sure.

I think you would only be able to claim expenses that were wholly and exclusively in the line of business - a car fails that test.

Probably the best way to reduce your tax bills is to 'reduce' your income - by making sure you claim for all the expenses you are allowed to by HMRC.

Hope this helps.

NastyMatt

Depends on if you are going to make some serious money over the cost of the interest. If you are, then make a company but remember you will be hit with some nice bills from an accountant.

If I was you I'd not bother, what I would do is get as much equity out of each right now. If you can get 85% then great. Your profit over the interest on that will be marginal.

Now deduct your EA fees each year, deduct white goods you will have to replace, cleaning, repairs etc You will easily make it look like you have made a loss.

The trick to letting is to make a loss.. I know it sounds bad but you won't in reality as that equity you have removed is tax free.. pay off your own mortgage with it and reduce your monthly mortgage bills you are paying in the house you live in (does that make sense??).

Not sure if I explained it well?!?!

Here is an example.

hA = House A - rental
hB = House B - your own house you live in

hA = worth £100k - owe £30k
hB = worth £200k - owe £100k

Remortgage hA getting £85k out as interest only. Pay off £30k mortgage owing £55k. You have £55k in the bank. Pay off £55k of hB's mortgage.

hB's mortgage is now only £45k and your repayments are reduced. hB looks like ti is costing you a fortune but the rent is just covering it - so you are not making a profit - so nothing to pay to the tax man.

no accountant fees.. no company.. a LOT less stress.

Sorry if you knew all this already.. but some one else reading this thread may not have realised that's the best way to run a btl and a "private" home together.

Plus.. sorry if this makes no sense at all!!

Matt

trencherpilot

The crafty way of doing this to reduce capital gains tax is to remortgage the property before you want to sell it for as much as you can get.... about 6 months before and stash the money, then when you sell, the bulk of the sale price covers the mortgage plus redemption fees etc. = reduced cap. gains tax.

Don't know if its ethical, but at the minute it's legal. Just hope Gordon doesn't browse on here!

zico_2

Are you sure this is possible, trencherpilot? I thought the Capital Gains was on the amount your property had appreciated since purchase, regardless of how much the mortgage is on it when you sell? I only ask as I am in the process of selling a BTL property and will have made a substantial gain on the original purchase price, and have taken equity out previously, but could probably get more equity out now. Also I wonder if anyone knows if you reinvest profit from BTL property do you still have to pay Capital Gains tax once you sell first property?

Innys

Erm...I don't think what you have suggested is legal in the eyes of the tax man, NastyMatt.

If you take your suggestion to the extreme a landlord could borrow against the equity in a rented property and use the money for any personal purpose; car, holiday, extension to their personal house.

Those costs are not allowable deductions from the rental income because they have nothing to do with the rental income. Similarly, reducing your own house's mortgage is totally unrelated to the rental income.

That's NOT to say though, that a lot of landlords don't do what you have suggested. I'm sure they do - it's just they run the risk of some very awkward questions if the tax man starts wondering why the deductions in respect of mortgage repayments against rental income have rocketed.

Take the chance if you want to - I'd rather not, thanks very much. :cool:

Ian_W

I agree with Innys. You can borrow against your main residence, or even unsecured, to purchase a BTL and claim the interest as an allowable business expense for income tax on your SA return. What you borrow against doesn't matter - the purpose of the loan is all important as to whether it's an allowable expense for either income tax or CGT IMO.

So if/when you're asked to show what business purpose you used the equity released - the answer will be????

Maybe you'll get lucky and they won't ask - but there again, they got Al Capone for tax evasion!! _pale_

Ian_W

trencherpilot wrote: The crafty way of doing this to reduce capital gains tax is to remortgage the property before you want to sell it for as much as you can get.... about 6 months before and stash the money, then when you sell, the bulk of the sale price covers the mortgage plus redemption fees etc. = reduced cap. gains tax.

Don't see how that works either?
Buy in prop in 2000 for £100k with £85K mortgage.
Sell it in 2005 for £200K having remortgaged to £170K.

Your capital gain for tax is [200-100] £100K, not [30-15] £15K. You can deduct buying, selling and improvement costs and you will have various reliefs like taper, personal all etc which can also be deducted. The original mortgage was used to buy the property, so any gain is over and above the purchase price. Unless you can show the remortgage was for improvements then what you owe at the end is totally irrelevent to HMR&C IMO.

Not crafty, illegal I would have thought. Stupid as well, considering there are a fair number legitimate reliefs available to mitigate CGT. :doh:

richgirl

irishno1 wrote:

Hi,

If I am renting two buy to let properties would I have to pay less tax on rental income and capital gains tax when I go to sell if I set myself up as a company?

I presume cars etc could then be claimed as expenses and would this also reduce capital gains tax? Thanks

Yes less tax as you can deduct expenses, and also you can save on tax by paying profits as dividends to low wage directors perhaps your partner ?