BTL Taxation

kriss_boy

Ive been researching turning my home into a BTL, and buying a bigger place for my wife and I.

Am I correct with the following,

1) I do not have to pay tax on the annual rental income if I tweak the mortgage repayments to equal the rental yield?

2) I only pay capital gains tax if the property sells for 10K more than I paid for it? I paid 84K... I reckon it may be 10 years before its worth 94K!

Would I be taxed on the value of the property... ie 20% of 84K... or just taxed on the value it went up by... 20% on 10K?

Thanks

angelsmomma

No you can not "tweak" the mortgage payment to reduce tax :rotfl::rotfl::rotfl:

kingstreet

Your pay income tax on the rental income, less any allowable expenses. For this purpose, only mortgage interest is allowable. Capital repayments are not included.

Your annual capital gains tax allowance is £10,600 for this year. When you sell an asset, the gain is calculated by dividing the difference between the selling price and the buying price by the number of complete years the property wasn't your main residence. There's also a three year cross-over period, but TBH I'm not sure how this will apply to you.

Once you know the gain, any amount above your allowance for that year will be added to your income and taxed at your marginal rate.

Thrugelmir

kriss_boy wrote: »

1) I do not have to pay tax on the annual rental income if I tweak the mortgage repayments to equal the rental yield?

2) I only pay capital gains tax if the property sells for 10K more than I paid for it? I paid 84K... I reckon it may be 10 years before its worth 94K!

1) Interest only. Not the capital element of the repayment

2) Why bother for a £10k gain?

kriss_boy

kingstreet wrote: »

Your pay income tax on the rental income, less any allowable expenses. For this purpose, only mortgage interest is allowable. Capital repayments are not included.

Does it make a difference that Im up in Scotland?

I have friends who had financial advisors arrange their mortgages and assist them in getting started. They said they didnt have to pay tax. Is this dodgy dealings or is there a way?

Obviously if the tennant is only paying the interest, then your not gaining anything from them- you are just getting a 0% loan really... you'd be better off putting your money in a savings account.

kriss_boy

Thrugelmir wrote: »

1) Interest only. Not the capital element of the repayment

2) Why bother for a £10k gain?

Because our house has dropped in value... and we would have to subsidise its sale with money we've set aside as a deposit for the new house.

If our place sells for 74K and the mortgage is 78K ,do we just send our lender a cheque for 4K or can it be added to new place. ie, our 130K offer on the new house, has a 134K mortgage?

kingstreet

It makes no difference you are in Scotland. I do not know what other advisers may have suggested. Study the allowable expenses you can offset. There are plenty you can use to reduce the taxable surplus.

On your other questions, when you sell, your current mortgage is repaid by your solicitor. He holds on to any excess funds, or you make up any shortfall before completion.

If you are buying on, the solicitor puts those excess funds, together with the money from your new mortgage and any deposit savings you put in, to the vendor's solicitor on completion day and your purchase is completed.

Thrugelmir

kriss_boy wrote: »

I have friends who had financial advisors arrange their mortgages and assist them in getting started. They said they didnt have to pay tax. Is this dodgy dealings or is there a way?

Obviously if the tennant is only paying the interest, then your not gaining anything from them- you are just getting a 0% loan really... you'd be better off putting your money in a savings account.

If there's no profit made from letting the property. Then you are reliant on a capital gain to make a profit. Hence my previous comment.

kriss_boy

Thrugelmir wrote: »

If there's no profit made from letting the property. Then you are reliant on a capital gain to make a profit. Hence my previous comment.

Ok, I understand now.

Lloyds said they will change the mortgage to a BTL rate of around 4.5%.... that equates to £230 per month, so based on £425pcm, Id be 'making' £195 per month.

Is this rough calculation correct, I pay tax on

((£195 x 12) - £300 maintenance costs ) x 0.8 (tax) = £1600.

Its a modest yearly profit to avoiding losing on the place, and to work on the assumption that it may also rise by £1,000 per year too,

Thrugelmir

£300 a year for maintenance?

Don't forget all the other costs involved in letting. Then there's the void rental periods and tenant defaults.

kingstreet

Have a look at the allowable expenses here;-

http://www.which.co.uk/money/tax/guides/tax-on-property-and-rental-income/allowable-expenses-and-allowances/