Tax Savings for Landlords

The_Palmist

steampowered said:

You should see BTL as an investment. Not as an excuse to sentimentally keep the old house.

The fact that you are making a loss on this suggests it is a bad investment. You should consider:

- Selling the property, and instead buying somewhere with a higher yield (though this could mean SDLT).

- Selling the property, and instead putting the money into a stocks & shares ISA (which generates tax free returns) or boosting your pension (which will give you a 40% top-up from the government as you are a higher rate tax payer). 

As you are a higher rate tax payer, making the most of your S&S ISA allowance and the tax relief on pension contributions is going to be far more profitable than anything BTL can offer.

I get your points thanks.
The loss I am making is largely due to tax, if/when I can get my Mrs on DOT [2023], it will generate a little profit or at least break even. Call me old fashioned, I like the fixedness of bricks and mortar :-)

dimbo61

The_Palmist is like many landlords not making a profit but they are paying down a repayment mortgage ? 
Therefore building up equity in the property.
Well done 2.5% is a very very good mortgage rate ! Well it would be for a BTL interest only mortgage ! If you had one.
As I said 18 months ago when you can sort it you can transfer the property into both names as tenants in common with the low rate tax payer owning say 90/95% and using there tax allowance.
You can then consider if you want a BTL mortgage on interest only or overpay every year with the 10% allowance most. BTL deals offer.

The_Palmist

dimbo61 said:

The_Palmist is like many landlords not making a profit but they are paying down a repayment mortgage ? 
Therefore building up equity in the property.
Well done 2.5% is a very very good mortgage rate ! Well it would be for a BTL interest only mortgage ! If you had one.
As I said 18 months ago when you can sort it you can transfer the property into both names as tenants in common with the low rate tax payer owning say 90/95% and using there tax allowance.
You can then consider if you want a BTL mortgage on interest only or overpay every year with the 10% allowance most. BTL deals offer.

Thanks Dimbo and yes the 2.5% was my residential mortgage deal fixed till 2023, Halifax gave me consent to lease and it seem like a good idea to just continue with it. My only pain point is the fact that my mrs is not working and I cannot utilise her tax allowance. If it wasn't for £2k or so annual tax, I would have no complaints, happy with just breaking even.
For 2023, I intend to do as you suggested and also reduce outstanding mortgage by over payments, not massive but I reckon by 2023 we will have 70% equity all being well. I estimate I have 50% equity now.

AdrianC

steampowered said:

You should see BTL as an investment. Not as an excuse to sentimentally keep the old house.

The fact that you are making a loss on this suggests it is a bad investment.

No, it isn't an investment. It's a business.

A loss-making business based around a massively expensive, illiquid single asset.

oldbikebloke

The_Palmist said:

I have had a chat with Halifax mortgage advisor this morning, before I rented the property out, I was on a residential mortgage fixed till April 2023 at 2.5% and Halifax gave me consent to lease.
They said to add my Mrs will be like a new mortgage application and I will need to pay £2k+ for early exit from fixed deal. 
So taking in to account the cost of early exit, cost of new mortgage including any fees etc. it is not looking very efficient to do anything till 2023 :-(

an unsurprising outcome frankly.

the fact you had (time limited) consent to let on a residential mortgage would imply Halifax were looking to make changes to the terms at a future date.

After all very few "accidental landlords" are allowed to carry on a residential mortgage ad infinitum when they let their previous home. By that stage, lenders expect you to be a professional LL and to pay accordingly on a BTL mortgage, for which the lender wants a larger slice of the action as they too are in it to make money, just like a landlord.

Although I appreciate it does not look that way, adding a non earning wife to a mortgage which was based on your sole income does alter the lender's risk and so again unsurprising they required you and her to go through a new application 

if it is any consolation, I doubt their stance would have been any different if you had seen the earlier post 18 months ago from 00ec25 anyway and tried then.

The_Palmist

oldbikebloke said:

if it is any consolation, I doubt their stance would have been any different if you had seen the earlier post 18 months ago from 00ec25 anyway and tried then.

Thanks, it does give me a little consolation. 
I will aim to reduce any outstanding mortgage to less than 25% by the time this fixed deal is over in 2023.

unkle

I'm struggling to understand how you are making a loss here, 60,000 mortgage at 2.5% is £1.5k per year, how much are you renting it for? I've got a couple fo properties of similar value and get between £8.5k and £9.5k a year in rent.

The_Palmist

unkle said:

I'm struggling to understand how you are making a loss here, 60,000 mortgage at 2.5% is £1.5k per year, how much are you renting it for? I've got a couple fo properties of similar value and get between £8.5k and £9.5k a year in rent.

Ok so 60k is outstanding mortgage.
Annual payments to bank is 5400
Rent is 7500
I don't have any big expenses to claim so almost all income is taxed at higher rate.

oldbikebloke

The_Palmist said:

unkle said:

I'm struggling to understand how you are making a loss here, 60,000 mortgage at 2.5% is £1.5k per year, how much are you renting it for? I've got a couple fo properties of similar value and get between £8.5k and £9.5k a year in rent.

Ok so 60k is outstanding mortgage.
Annual payments to bank is 5400
Rent is 7500
I don't have any big expenses to claim so almost all income is taxed at higher rate.

we will assume your income (excluding rental profit) makes you a HR taxpayer to start with...?
rental income 7,500
less non financing expenses 0
taxable profit 7,500
tax due 7500 x 40% = 3,000
less tax credit for interest on financing costs (60,000 x 2.5%) = 1,500 x 20% = 300
net tax due 3,000 - 300 = 2,700
overall post tax cash profit 7,500 - 2,700 = 4,800 so hardly a "loss"!
(Although obviously not particularly tax efficient given wife has no income in her name)

I assume you realise the 5,400 paid to the bank is a mix of interest and capital repaid? The capital is pure "profit" for you since that represents an increase in your personal net worth. In cash terms 5,400 - 1,500 interest = 3,900 increased net worth (equity) per year, set against 4,800 post tax income, so you are in reality both covering your costs and increasing your net worth

steampowered

The_Palmist said:

I get your points thanks.
The loss I am making is largely due to tax, if/when I can get my Mrs on DOT [2023], it will generate a little profit or at least break even. Call me old fashioned, I like the fixedness of bricks and mortar :-)

That's completely understood.

The only thing I would say is, as you are a higher rate tax payer, you shouldn't turn your nose up at pensions. Each pound you put into a pension will get a 40p top-up from the government - that's huge. That benefit may well get withdrawn in future so it is worth making the most of it while you can.

Not to mention that the returns will accumulate tax free within your pension, compared to the 40% income tax you would pay on the rent from a BTL.

If you like property, you could invest in property through a pension. Aviva and Legal & General both have investments fund you can hold within a pension which invest in property.