BTL Tax Info Wanted Please

tafer2uk

My brother and I are thinking about buying a house to let out, obviously we would get professional advice before taking the plunge but thought I would pick some brains on here first.

Reading around it seems that you can deduct certain things for tax purposes such as mortgage interest, landlord insurance etc.. Could somebody briefly explain how tax is deducted and calculated please?

If a property was purchased with a BTL mortgage and the interest part was say £180, how is that deducted from the taxable monthly rent of say £450? Is it as simple as £450 - £180 = £270? Thus paying tax on the £270 part?

The next question is would you be better off in general paying the mortgage off early if in a position to do so, or keep taking advantage of the tax relief?

Lastly would the tax be split equally between us i.e. £135 and then paid at the lower or higher tax rate depending on our circumstances?

Thanks

:beer:

taxsaver

Yes, you've pretty much got it. To be clear though, it's done on an annual basis coinciding with the tax year and not monthly. Both you and your brother would need to inform HMRC that you now have income from property and they will then start to include you in the Self-Assessment tax regime, requiring you to submit an annual return. There are ofc other costs than can be set-off against tax beyond those you have mentioned; depending on your circumstances.

As far as paying off the mortgage more quickly; that very much depends on your objectives from the endeavour. Many BTL investors firmly advocate interest only mortgages, thus maintaining the the highest possible cost in order to reduce tax, taking the investment view that what they are really after is capital appreciation (which atm is somewhat thin on the ground!). Personally, I like to work toward building a source of 'passive' income on which to live so advocate repaying BTL mortgages over no more than 15 years. It's really a matter of personal choice.

tafer2uk

Thanks taxsaver, this is a bit of a do up an old house job with a view to it being a long term investment/nest egg. It would be great to be able to build up a portfolio over time but guess we need to learn to walk before we can run. At least now we know roughly how much of the rental income we get to keep and how much HMRC do.

Thanks

clutton_2

there used to be a booklet called Taxation of Rents issued by the Revenue... it may still be googleable - it tells you what sort of expenses you can claim against your tax bill.. a lot more than you might imagine

tafer2uk

Thanks clutton, will have a search.