BTL new tax conundrum

westernpromise · 15 April 2016 at 11:40PM

Have you not yet realised that Clause 24 is aimed exactly at you and intends to put you out of the game or indeed bankrupt you?

kiridoh · 15 April 2016 at 11:49PM

kinger101 wrote: »

The capital repayment is irrelevant for tax purposes. I wasn't aware you'd provided any calculations to double check. Looking at your speadsheet, in 2020, the mortgage balance is around £170K. Which gives approx £6.5K of interest. The tax will be £12000 @ 40% = £4800 - 20% of interest (£1300) leaving you a tax bill of £3,500. On top of mortgage payments of £12K and all the other costs associated with being a LL. Of course, we don't know what the interest rates are in 2020.

OK, thanks. So, assuming no other costs to deduct, my profit on a more realistic £1,200 monthly rental would be:

£14,400 [RENTAL INCOME] minus
£4,460 [TAX BILL] minus
£11,860 [£988.49x12 MORTGAGE REPAYMENTS]
= -£1,920

Correct?

westernpromise · 15 April 2016 at 11:56PM

You aren't going to be getting a 5.8% yield net of letting costs.

Try 4% gross then knock off 15% of that for letting / vetting.

Then a bit of void and a bit of maintenance.

Say £10,000 loss per annum.

kinger101 · 16 April 2016 at 12:05AM

kiridoh wrote: »

OK, thanks. So, assuming no other costs to deduct, my profit on a more realistic £1,200 monthly rental would be:

£14,400 [RENTAL INCOME] minus
£4,460 [TAX BILL] minus
£11,860 [£988.49x12 MORTGAGE REPAYMENTS]
= -£1,920

Correct?

Well, yes. But in the real world, properties require maintenance. There are void periods. The tenant might not pay the rent. You might have to go to court to evict them. They might trash it before they leave. Interest rates might go up.

Owning many properties mitigates these risk somewhat, as it balances out. If you have only a single property and get a bad tenant in or need a major repair, you're in real trouble. Particularly on an over-leveraged property. You're already paying out more that you receive, so I don't see where your contingency fund is.

Cakeguts · 16 April 2016 at 12:28AM

Where exactly in the country are you thinking of buying this imaginary property?

booksurr · 16 April 2016 at 12:30AM

in the tax year 2020/21 you will pay £6,420.25 interest, given a loan of 191,250 over 25 years commencing April 2016 @3.8%. https://www.drcalculator.com/mortgage/uk/

You will pay 988.49 x 12 = 11,861.88 in gross payments during the year

with rental income of 1,200 pcm the correct tax position for the whole tax year 20/21, given 40% tax rate and no other costs, is:

gross income: £14,400
tax thereon: 14,400 x 40% = 5,760
less tax reducer based on mortgage interest of 6,420.25 x 20% = 1,284.05
net tax payable 5,760 - 1,284.05 = 4,475.95

in cash terms therefore you will have a NEGATIVE CASH FLOW
14,400 - 11,861.88 - 4,475.95 = -1,937.83

kinger101 · 16 April 2016 at 7:16AM

Even on a IO mortgage, you're on a £4,280 profit after tax now, and £2,826 profit by the time the new rules fully kick in. Of course, this excludes all the other things that happen in the real world I've posted above.

If rates hit 6% however, you make a £540 net loss in 2020. Assuming this is a second property, you also need to find £10,400 SDLT, as well as all the other upfront legal costs (and potentially ongoing refinance costs).