buy to let

havingaball74

Ok, I still don't get it after sitting with my calculator. Please can someone do the sums for me?
Wages=37k
Rent=550x10=£5500
mortgage= £6000 capital repayment (£1770 interest only)
expenses=£700
I am a 20% tax payer at the moment but I believe that 37000+5550 rent would just about push me into the 40% tax band. How does this work PLEASE. Am just about to sign up for a BTL but the numbers do not add up.

HappyMJ

havingaball74 wrote: »

Ok, I still don't get it after sitting with my calculator. Please can someone do the sums for me?
Wages=37k
Rent=550x10=£5500
mortgage= £6000 capital repayment (£1770 interest only)
expenses=£700
I am a 20% tax payer at the moment but I believe that 37000+5550 rent would just about push me into the 40% tax band. How does this work PLEASE. Am just about to sign up for a BTL but the numbers do not add up.

It's £5,500 minus £1,770 minus £700 leaving profit of £3,030. You pay 20% tax on that. £606. You will still be in the 20% tax band.

havingaball74

Thanks. I thought that 37k+(rent of £550x12)=£6660. Total=43600.
That pushes me over the £41k tax bracket into 40%. So, I pay 20% or 40%? If the wages+the rent take me over into the 40% tax bracket, how come I only pay 20% tax. I am soooo confused. HappyMJ- you have been so brilliant. I know I must sound daft. I am worried that I am about to sign up to a BTL with all the news about the tax changes. I do not want to do it if I make zero profit (or worse still go into no profit as 2020 approaches with the tax changes).

booksurr

havingaball74 wrote: »

Thanks. I thought that 37k+(rent of £550x12)=£6660. Total=43600.
That pushes me over the £41k tax bracket into 40%. So, I pay 20% or 40%? If the wages+the rent take me over into the 40% tax bracket, how come I only pay 20% tax. I am soooo confused. HappyMJ- you have been so brilliant. I know I must sound daft. I am worried that I am about to sign up to a BTL with all the news about the tax changes. I do not want to do it if I make zero profit (or worse still go into no profit as 2020 approaches with the tax changes).

HappyMJ's calculation is based on your 10 months of rent not the 12 months you now ask and also does not follow the correct order of calculation because it deducts the mortgage interest in full as part of the calculation. The correct methodology is to ignore the interest when computing the taxable sum and then deduct the interest as a credit against the total tax bill.

as an example based on the 15/16 tax year rates and allowance, the rule works thus:

1. HR tax starts at 10,600 personal allowance + 31,785 basic rate band = 42,385

2. your rental profit for the purposes of determining which tax band you fall into will be: 6,660 rent - 700 expenses = 5960 rental profit

3. your taxable income for 15/16 is thus 37,000 + 5960 = 42,960 and patently 42,960 > 42,385. You are therefore classed as a HR taxpayer (by £575) and your mortgage relief is thus capped at 20%

the tax you will pay on your rental profit is therefore:
575 @40% = £230
5960 - 575 = 5385 @ 20% = £1077
mortgage relief 1770 x 20% = £354

final tax payable (on the rental profit) 230+1077-354 = £953

obviously you will also pay tax on your 37,000 of salary but all of that will be at 20%

You are therefore close enough to the HR threshold that you can change the position by reducing the amount of your salary which is taxable by paying some of it into a pension so instead of the full 37,000 being taxable it would be 37,000 less whatever you pay into a pension.

however, always remember the golden rule: never let the tax tail wag the dog

MJ12

Brighty wrote: »

The real shock with this new rule is that, as mortage interest is dealt with seperately as a 'credit', it means peoples taxable income will go up by whatever their mortgage interest is, pushing many who think they are safe in the 20% into the 40% bracket.

Brighty

And that would have meant that suddenly your savings account interests would be taxed an extra 20%. Good job the £1000 allowance for interest income coming in next year.

ASutton

The real shock with this new rule is that, as mortage interest is dealt with seperately as a 'credit', it means peoples taxable income will go up by whatever their mortgage interest is, pushing many who think they are safe in the 20% into the 40% bracket.

Brighty[/QUOTE]



Anyone with additional properties should sign the following petition.


https://petition.parliament.uk/petitions/104880


This will have a big impact on private landlords who, like Brighty states, will have their income pushed into the Higher tax bracket. I have 4 properties so I am effectively screwed. My earnings will be stated as 24,000 per year before I do a days work even though the profits from the properties are 9k. Any additional earnings over an 18k and I will be taxed at 40%.


I am considering selling, which would be a shame for the working families in my properties. I have built this portfolio up because I work hard and now face being penalised heavily for the late nights and weekends spent renovating these properties.

le_loup

ASutton wrote: »

I am considering selling, which would be a shame for the working families in my properties.

Great. If enough other do the same it may bring prices down sufficiently for "working families" (should that have the word "hard" inserted?) to buy the properties themselves.

MJ12

ASutton wrote: »

I am considering selling, which would be a shame for the working families in my properties. I have built this portfolio up because I work hard and now face being penalised heavily for the late nights and weekends spent renovating these properties.

There is still time to de-leverage. The change doesn't come in until April 2017 and will not be completely implemented until 2020.

Also, consider 4-day weeks. Perhaps even 3-day weeks :cool:. Personally I would prefer half days though, so 5 x 0.5 days. Have a lie in in the morning, leave work early everyday.

ASutton

le_loup wrote: »

Great. If enough other do the same it may bring prices down sufficiently for "working families" (should that have the word "hard" inserted?) to buy the properties themselves.

House prices will not go down, to think they will is just ridiculous. This tax will only make people who can't afford to buy, largely due to their own financial irresponsibility, homeless.


The demand for rentals will rise, pushing up rents and it will be the limited property companies and the rich, with no mortgages who cash in.

booksurr

ASutton wrote: »

House prices will not go down, to think they will is just ridiculous. This tax will only make people who can't afford to buy, largely due to their own financial irresponsibility, homeless.


The demand for rentals will rise, pushing up rents and it will be the limited property companies and the rich, with no mortgages who cash in.

?????

so you will sell off your portfolio because you are facing a higher tax bill (incl potentially having to pay tax on a negative cashflow as your mortgage interest is > allowable expenses and net cash "profit") which is a reasonable response from someone in your position. Then what?

those properties, along with all the other such properties released by the floods of inadequately funded BTL'ers you are predicting will exit the market, can either be bought by a) homeowners who thus remove demand from the rental market or b) LL who thus increase their capacity and therefore introduce supply into the rental market

however rather than such simple economics, you "predict" the whole world will fall at the feet of the "rich" who will buy property they certainly don't want to live in (otherwise it would not be part of your rental portfolio) and do what with such mediocre property? Could they possibly do b)?????

increased supply = lower prices, but of course that does not suit your conspiracy theory.