buy 2 let tax query

dale123boy

Hi,
My wife and I are currently considering buying a buy to let, and are reasonably aware of the practical risks involved with maintenance/tenants etc but are a bit unsure about the tax situation and how to calculate exactly what we'll earn

Is it possible to use an additional borrowing of 20k from our current property to fund the deposit on an 80k buy 2 let (we currently are 50%LTV on our £200k house?)

I believe our mortgage costs will be approx £90 for the 20k advance (capital and interest) and £230 for the 60k buy to let interest only, whilst the rent would likely be £500 per month

So if the above were true, our total income would be £6k a year and our outgoings would be 3840 in finance plus insurance/maintenance etc

For calculations sake if our profit on the above was £1500 a year could someone tell me what I would be taxed on it? I earn £36500 and my wife earns £7000 I have tried to work it out online, however it also looks like mortgage tax relief is going to change over the coming years?

thanks in advance,

Dale

anselld

Yes, the interest on your additional borrowing is allowable (not the capital repayment element) provided there is a clear link showing it has been used to fund the BTL.

Given your incomes, you would be best to own the BTL as Tenants in Common in unequal shares (eg 1:99) and notify HMRC on Form 17. This would ensure that your wife is entitled to 99% of the income and can make best use of her personal allowance and lower rate tax band.

aveylee

As always this is not formal advice and should not be relied on.

(1) Only mortgage interest that is allowable as an expense. So the capital element of the prospective £90 mortgage is not allowable.

(2) HMRC will may well dispute that the additional mortgage on your current property is allowable. Perhaps if you had formal loan agreement documents from the bank it might be allowed. However on this point I really would advise getting professional advice or from HMRC.

(3) In any case as you say mortgage as an expense looks like it is going. So if you are going into business ensure you can turn a profit without it.

(4) Property is taxed at the general rate (e.g. 20% for basic rate payers, 40% for higher rate, 45% for additional rate).

Tax is a personal matter between individuals and HMRC. So if you were to declare the property income as yours you would pay 40% on it (e.g. about £600). This is in additional to any tax you pay now.

However if you wife was to declare it she would likely not pay any tax on it. As her £7,000 + £1,500 would still be below her personal allowance (PA).

Even if / when the mortgage interest comes into play she will probably only just exceed her PA if at all, and any tax would be minimal.

One downside is that your wife would need to submit a self-assessment return, but with her tax affairs that would be relatively simple, and certainly not warrant the cost of an accountant doing it.

Hope this helps and you may wish to consider going to the HMRC wesite (now on gov.uk) and looking for the Property Income Manual for more detailed advice.

booksurr

aveylee wrote: »

(2) HMRC will may well dispute that the additional mortgage on your current property is allowable. Perhaps if you had formal loan agreement documents from the bank it might be allowed. However on this point I really would advise getting professional advice or from HMRC. they will expect an adequate audit trail to show how the additional borrowing was spent, they will not "dispute" it as it is perfectly normal to borrow against the residential property and spend it on the rental business. All that is needed is a record of the date the money was obtained and bank statements to show the same sum was spent on the BTL purchase.

(3) In any case as you say mortgage as an expense looks like it is going. So if you are going into business ensure you can turn a profit without it. agreed it looks that way but it could be sometime before it happens, after all the transitional arrangements for higher rate tax relief do not finish until 2020/21 so we expect basic rate relief will continue until at least then

(4) Tax is a personal matter between individuals and HMRC. So if you were to declare the property income as yours you would pay 40% on it (e.g. about £600). This is in additional to any tax you pay now. no he won't, you have not allowed for the personal allowance, 36,500+1,500 <42,385

you are a basic rate taxpayer, you have a fair way to go before you reach higher rate tax (currently 42,385 incl PA) and that is before the already announced plans for personal allowance increases in the future,
your wife is a non taxpayer

at first glance it would be more tax efficient for your wife to own it in her sole name, although presumably she would not be able to obtain the borrowing given her income so it looks like it must be co-ownership.

if you jointly own, the income must either be split 50/50 (HMRC's default position as it assumes joint tenancy) or (using Form 17) in whatever % represents your respective ownership shares (1/99 you/her as suggested) under tenants in common

how long, if at all, before interest relief is removed is a guessing game, although a very valid point to say that you should do a worst case budget where there is no such relief (ie your profits are reduced by ONLY 20%)