BTL, one with lower LTV or three with 75% LTV?

AnotherJoe

Profit will be £1300+/month after all cost, maintenance and tax.

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So after 3 years you'll have broken even once you factor in the £44k of SDLT.

kinger101

ACG wrote: »

My understanding is that in the future it will be taxed on income minus tax relief. Where as at the moment it is Income minus interest minus tax relief and then tax.

Lets not forget the changes to "wear and tear" deductions also.

Typically interest is going to be the biggest expense on highly geared properties.

It probably would not matter too much in this instance with good tax advice, but in theory it could potentially put the higher earner in the higher tax threshold.

I suppose really the point of my post was to ensure they speak to an accountant/tax advisor and get professional advice before committing to one or the other. I do not know the full ins and outs, I am not allowed to advise on it but it will have an impact on the profit.

Historically I would have said get multiple BTLs, spread the risk in case there are void periods/bad tenants etc but I am not so sure I would be looking at it that way anymore.

The changes mean that the deductions for interest will be restricted to the basic rate of tax. This is being tapered in gradually. It doesn't have any impact on anyone paying tax at basic rate.

However, HMRC don't like you using the property equity as a bank. For the first property, the interest deductions will be capped at the loan amount equivalent to the value of the property when it was first used in the letting business.

OP - you really need to go away and do some very basic research. The fact you can't even work out how much you can borrow shows you've given this minimal thought. People are good at answering specifics, but you can't expect them to do your thinking for you.

amnblog

Our OP should

Speak to an accountant about this plan

Speak to a mortgage broker about this plan

Speak to a friend or relative with multiple properties about this plan

Avoid all buy to let investment club type arrangements

amnblog

On the income tax front the interest relief on the mortgage is move from being offset against gross rental income as currently, to being offset against tax at 20%.

This makes no difference to a basic rates tax payer but an enormous difference to higher rate tax payers. (HMRC are stating 82% of landlords are BRT payers and unaffected)

It has been stated by some of the big accountancy firms that higher rate taxpayers with mortgage interest at 75% of rental income will make a loss.

EXAMPLE 1

Where property is the only source of income

Before restriction (2016 to 2017)
Property income calculation:
Rental income = £52,000
Finance costs = - £20,000
Other allowable expenses = - £9,000

Property profits = £23,000
Total income = £23,000

Income Tax calculation:
£11,000 x 0% = £0
£12,000 x 20% = £2,400
£0 x 40% = £0

Final Income Tax = £2,400

After restriction (2020 to 2021)
Property income calculation:
Rental income = £52,000
Finance costs (£20,000) = Nil deduction
Other allowable expenses = - £9,000

Property profits = £43,000
Total income = £43,000

Income Tax calculation:
£11,000 x 0% = £0
£32,000 x 20% = £6,400
£0 x 40% = £0

Less 20% tax reduction
for finance costs (£20,000 x 20%) -£4,000

Final Income Tax = £2,400

The tax reduction is calculated as 20% of the lower of:
finance costs (100% of £20,000) = £20,000
property profits = £43,000
adjusted total income (exceeding Personal Allowance) = £32,000
The lowest amount is finance costs, so £20,000 x 20% = £4,000 tax reduction.

EXAMPLE 2

Where landlord also earns £35,000 from employment

Before restriction (2016 to 2017)
Self-employment income = £35,000
Property income calculation:
Rental income = £18,000
Finance costs = - £8,000
Other allowable expenses = - £2,000

Property profits = £8,000
Total income = £43,000

Income Tax calculation:
£11,000 x 0% = £0
£32,000 x 20% = £6,400
£0 x 40% = £0

Final Income Tax = £6,400

After restriction (2020 to 2021)
Self-employment income = £35,000
Property income calculation:
Rental income = £18,000
Finance costs (£8,000) = nil deduction
Other allowable expenses = - £2,000

Property profits = £16,000
Total income = £51,000

Income Tax calculation:
£11,000 x 0% = £0
£32,000 x 20% = £6,400
£8,000 x 40% = £3,200

Less 20% tax reduction
for finance costs (£8,000 x 20%) -£1,600

Final Income Tax = £8,000

The tax reduction is calculated as 20% of the lower of:
finance costs (100% of £8,000) = £8,000
property profits = £16,000
adjusted total income (exceeding Personal Allowance) = £40,000
The lowest amount is finance costs, so £8,000 x 20% = £1,600 tax reduction.

Our higher rate tax payer now has £1,600 extra income tax to pay. He may also take a hit on child benefit as his total income exceeds £50,000.

If I were him I'd put the rent up to mitigate the tax cost.

brexit

Thanks everyone for all the helpful advice. Definitely I will use a MA for professional help.

Thrugelmir

brexit wrote: »

Thanks everyone for all the helpful advice. Definitely I will use a MA for professional help.

Perhaps scale back your plans to a more modest level and acquire further properties over a period of time by reinvesting the profits you make.

getmore4less

Current property has gross yield 4.46%. That's a bit low as a rental business your new property need to be better than that which will be hard with the acquisition cost.

wolfplayer

amnblog wrote: »

If I were him I'd put the rent up to mitigate the tax cost.

And perhaps end up with voids if tenant decides to give notice and go to a LL who has less debt. A BTL LLs debt doesn't determine rental values.

ACG wrote: »

Historically I would have said get multiple BTLs, spread the risk in case there are void periods/bad tenants etc but I am not so sure I would be looking at it that way anymore.

Let's hope those BTL investors who jumped in with that plan of multiple properties, with big debt, are set to get crushed with minor adjustment to taxation on BTL investment.

I only want to buy one house. Be nice if it's cheap from a greedy failure BTL landlord.

wolfplayer

ACG wrote: »

Historically I would have said get multiple BTLs, spread the risk in case there are void periods/bad tenants etc but I am not so sure I would be looking at it that way anymore.

How are multiple BTLs spreading the risk?

:rotfl:

Ever more BTL debt into one asset class, to people-farm those who can't afford one property.

No wonder the Treasury took action with Section 24 on BTL investor bubble, SDLT surcharge, and more tightening recently added. Multiple BTLs to spread risk?

And even now so many BTLers who've piled in, and BTL dreamers, still totally unaware of the changes.

SavingSteve

wolfplayer wrote: »

And perhaps end up with voids if tenant decides to give notice and go to a LL who has less debt. A BTL LLs debt doesn't determine rental values.



Let's hope those BTL investors who jumped in with that plan of multiple properties, with big debt, are set to get crushed with minor adjustment to taxation on BTL investment.

I only want to buy one house. Be nice if it's cheap from a greedy failure BTL landlord.

What a contemptible human being you are. How about focusing on your own shortcomings rather than wishing for the demise of others?