Tax Liability advice please

jgallcash

I wondered if somebody could please give some advice on the likely tax liabilities in ££ on a proposed BTL or to be able to signpost me to somewhere that I might be able to get some more information at all?

My partner and I are deciding whether to sell or to let out the flat we own as a current second property (which has until recently housed our parents). This will all likely depend on how financially viable it is. I know that there have been and continue to be a number of tax benefits being removed which makes BTL less profitable but I do not know the details of these in a real sense so it would be good to hear from others more knowledgeable.

The property was originally a shared ownership and has some quirks in the mortgage because of stair casing (part Interest Only and Part Repayment both with different rates but with the same lender). The initial plan is to get permission to let (I’ve been advised that this is unlikely to be a problem by the lender with no significant changes to current rate) rather than get a BTL just for now but in the interest of full info the property is worth £260-265k and the outstanding balance on the mortgage is £189k.

The property will genuinely need approx. £3-5k spending to get it up to a lettable standard but I’m presuming this will be initially able to be written off against tax?
The property is in joint names and owned 50/50 and so we will both be liable for tax and we earn £43k & £41k each so we are close to the higher tax threshold.

A conservative estimate of rent we can achieve is £1400 per month and we are planning on renting out without bills but have not decided whether to furnish or not to (depending on what the prospective tenant may want)

Here’s some of the costs we anticipate

Mortgage Part 1 (Interest Only) 1.45% - £130.50 per month
Mortgage Part 2 (Repayment) 4.24% - £481.66 per month
Service Charge (includes building insurance, maintenance of communal areas) £80 per month (is this tax deductible?)
Boiler and other services breakdown cover £40 per month
Landlord default on rental income insurance £12 per month
Accountant fees per month for tax -??? Per month

Could anybody please give me an idea on what our likely tax liabilities are going to be on this?

Thanks in advance

Dazed_and_confused

One thing you need to know is that mortgage payments are not an allowable expense.

Loan interest can be claimed in part but this is gradually being changed to it cannot be claimed.

Google residential landlords loan interest relief for more detail (its way too complex for a forum like this - there is a slightly different system in place for each of the next five tax years to start!)

jgallcash

Dazed_and_confused wrote: »

One thing you need to know is that mortgage payments are not an allowable expense.

Loan interest can be claimed in part but this is gradually being changed to it cannot be claimed.

Google residential landlords loan interest relief for more detail (its way too complex for a forum like this - there is a slightly different system in place for each of the next five tax years to start!)

I understood the basic premise but thought that the interest part could be claimed back?

Pixie5740

jgallcash wrote: »

I understood the basic premise but thought that the interest part could be claimed back?

No, you don't claim it back but you can (possibly) use it to offset the amount of income tax due.

https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income

saajan_12

jgallcash wrote: »

I wondered if somebody could please give some advice on the likely tax liabilities in ££ on a proposed BTL or to be able to signpost me to somewhere that I might be able to get some more information at all?

My partner and I are deciding whether to sell or to let out the flat we own as a current second property (which has until recently housed our parents). This will all likely depend on how financially viable it is. I know that there have been and continue to be a number of tax benefits being removed which makes BTL less profitable but I do not know the details of these in a real sense so it would be good to hear from others more knowledgeable.

The property was originally a shared ownership and has some quirks in the mortgage because of stair casing (part Interest Only and Part Repayment both with different rates but with the same lender). The initial plan is to get permission to let (I’ve been advised that this is unlikely to be a problem by the lender with no significant changes to current rate) rather than get a BTL - check how long they're willing to offer this.. often only for 1 year. Also check any freeholder / shared ownership specific agreement allows letting. just for now but in the interest of full info the property is worth £260-265k and the outstanding balance on the mortgage is £189k.

The property will genuinely need approx. £3-5k spending to get it up to a lettable standard but I’m presuming this will be initially able to be written off against tax? - what work needs doing? If it's before the first rental, and more long term in nature then you may be able to claim it as a capital expense against CGT when you sell. If its more cosmetic / maintenance and after your rental business starts, it may be claimable as an expense for your rental, against income tax.
The property is in joint names and owned 50/50 and so we will both be liable for tax and we earn £43k & £41k each so we are close to the higher tax threshold. - okay, so you'll pay 40% income tax on most of your rental income.

A conservative estimate of rent we can achieve is £1400 per month and we are planning on renting out without bills but have not decided whether to furnish or not to (depending on what the prospective tenant may want)

Here’s some of the costs we anticipate

Mortgage Part 1 (Interest Only) 1.45% - £130.50 per month
Mortgage Part 2 (Repayment) 4.24% - £481.66 per month - what's the interest portion of this?
Service Charge (includes building insurance, maintenance of communal areas) £80 per month (is this tax deductible?) - yes, against income tax
Boiler and other services breakdown cover £40 per month
Landlord default on rental income insurance £12 per month
Accountant fees per month for tax -??? Per month

Could anybody please give me an idea on what our likely tax liabilities are going to be on this?

Thanks in advance

Costs: few others you haven’t mentioned
- Repair costs
- LL insurance
- Lettings agent fee
- Referencing costs
- Deposit protection fee
- Gas safety cert

Income tax: you pay income tax on rental income net of non financing costs (all expenses due to the rental, except mortgage). As you are near the threshold, most of this is 40%. Then you get tax relief on the interest only portion of the mortgage, at varying rates. From 2020 the relief will all be 20%, before that a portion of your mortgage interest will get 40% (50% this year, 25% next year), the rest gets 20% relief.

CGT: when you sell, you’ll be liable for CGT on the increase in value, for the portion of time you didn’t live in the property, less a few other reliefs.

00ec25

Pixie5740 wrote: »

No, you don't claim it back but you can (possibly) use it to offset the amount of income tax due.

no possibly about it, the interest portion remains eligible for tax relief, but capped at 20% and applied as explained here:

https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies

Pixie5740

00ec25 wrote: »

no possibly about it, the interest portion remains eligible for tax relief, but capped at 20% and applied as explained here:

https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies

I was future proofing

00ec25

jgallcash wrote: »

The property will genuinely need approx. £3-5k spending to get it up to a lettable standard but I’m presuming this will be initially able to be written off against tax?

as already mentioned, if the property is currently "unlettable" then those costs will more likely be classed as capital expenditure which can be offset against the CGT liability when the property is sold. They cannot be offset against the first year's income tax
The property is in joint names and owned 50/50 and so we will both be liable for tax and we earn £43k & £41k each so we are close to the higher tax threshold. ok, so not great advantage is skewing the income share by altering the ownership,

A conservative estimate of rent we can achieve is £1400 per month and we are planning on renting out without bills but have not decided whether to furnish or not to (depending on what the prospective tenant may want)

Here’s some of the costs we anticipate

Mortgage Part 1 (Interest Only) 1.45% - £130.50 per month income tax allowable
Mortgage Part 2 (Repayment) 4.24% - £481.66 per monthinterest element only income tax allowable
Service Charge (includes building insurance, maintenance of communal areas) £80 per month (is this tax deductible?) income tax allowable
Boiler and other services breakdown cover £40 per month income tax allowable
Landlord default on rental income insurance £12 per monthincome tax allowable
Accountant fees per month for tax -??? Per month see below

Could anybody please give me an idea on what our likely tax liabilities are going to be on this?

Thanks in advance

accountancy fees are allowable where they relate to the costs of preparing your rental accounts

BUT the costs of preparing your tax return is not an allowable cost against your rental profits. A decent accountant should provide an apportioned bill, an indecent accountant may give you one bill and push the whole lot through your rental - after all, it is not him who HMRC will prosecute

Thrugelmir

jgallcash wrote: »

Mortgage Part 1 (Interest Only) 1.45% - £130.50 per month

What's the mortgage product?

Cheap rate at the moment. With £108k owed potentially leaves you exposed to future rate rises. Will your existing lender maintain this rate as well if you were to let the property. New BTL mortgage maybe significantly higher.