Tax Savings for Landlords

The_Palmist

steampowered said:

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 That benefit may well get withdrawn in future so it is worth making the most of it while you can.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. 

Good point, I will look in to it.

The_Palmist

oldbikebloke said:

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

Thanks and yes I get that now.

On a different note , with 2700 potential tax bill and more next year, I will be paying just over 10k in tax from rental property by 2023.
It is now looking very worth it to pay the penalty and fees for a new BTL mortgage with both our names on then do a DOT and not pay any extra tax.
Have I understood that correct.

oldbikebloke

The_Palmist said:

Thanks and yes I get that now.

On a different note , with 2700 potential tax bill and more next year, I will be paying just over 10k in tax from rental property by 2023.
It is now looking very worth it to pay the penalty and fees for a new BTL mortgage with both our names on then do a DOT and not pay any extra tax.
Have I understood that correct.

sorry, I'm not following where you get £10k of tax from using the values mentioned so far. 
The illustration I did above is based on the full rate applicable from 6 April 2020 so why you think that will approximately quadruple in 2 years time needs further explanation from you 

The_Palmist

oldbikebloke said:

The_Palmist said:

Thanks and yes I get that now.

On a different note , with 2700 potential tax bill and more next year, I will be paying just over 10k in tax from rental property by 2023.
It is now looking very worth it to pay the penalty and fees for a new BTL mortgage with both our names on then do a DOT and not pay any extra tax.
Have I understood that correct.

sorry, I'm not following where you get £10k of tax from using the values mentioned so far. 
The illustration I did above is based on the full rate applicable from 6 April 2020 so why you think that will approximately quadruple in 2 years time needs further explanation from you 

First of all thank you for the time you and other forumites are taking to give guidance, it is much appreciated.
Ok so I calculated the overall tax paid to HMRC till the end of current fixed mortgage deal [till 2023]
April 2018 - 2019 - £1800 - paid
April 2019 - 2020 - approx £2500 - to pay
April 2019- 2021 - approx £3500 - to pay
April 2021 - 2021 - approx £3500 - to pay
April 2021 - 2021 - approx £3500 - to pay
April 2022 - 2023 - approx £3500 - to pay
So, my point was if it cost be £1800 get out fees + £1500 for a new mortgage + £250 for DOT, am I better off forking some money upfront and get it all done now rather than waiting for 2023. 
Now the risk is I am not sure if I will get a good deal BTL with Wife's name on. 
Hope that makes a bit of sense.

unkle

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.

OK, so you are no where near making a loss. If you are paying £5,400 to the bank nearly £4k of that is paying off capital.

Before other expenses, £7,500 in rent, £1,500 in mortgage interest, thats £6k profit.

Not sure what your initial outlay was, but that doesn't look a bad return pre tax! 

oldbikebloke

The_Palmist said:

oldbikebloke said:

The_Palmist said:

Thanks and yes I get that now.

On a different note , with 2700 potential tax bill and more next year, I will be paying just over 10k in tax from rental property by 2023.
It is now looking very worth it to pay the penalty and fees for a new BTL mortgage with both our names on then do a DOT and not pay any extra tax.
Have I understood that correct.

sorry, I'm not following where you get £10k of tax from using the values mentioned so far. 
The illustration I did above is based on the full rate applicable from 6 April 2020 so why you think that will approximately quadruple in 2 years time needs further explanation from you 

First of all thank you for the time you and other forumites are taking to give guidance, it is much appreciated.
Ok so I calculated the overall tax paid to HMRC till the end of current fixed mortgage deal [till 2023]
April 2018 - 2019 - £1800 - paid
April 2019 - 2020 - approx £2500 - to pay
April 2019- 2021 - approx £3500 - to pay
April 2021 - 2021 - approx £3500 - to pay
April 2021 - 2021 - approx £3500 - to pay
April 2022 - 2023 - approx £3500 - to pay
So, my point was if it cost be £1800 get out fees + £1500 for a new mortgage + £250 for DOT, am I better off forking some money upfront and get it all done now rather than waiting for 2023. 
Now the risk is I am not sure if I will get a good deal BTL with Wife's name on. 
Hope that makes a bit of sense.

the only difference from 19/20 to 20/21 is one quarter of your mortgage interest charge no longer counts as a deduction from profit, so I don't see how you have a £1,000 uplift from a 60k mortgage unless you are using actual values significantly different to those previously shown?.

for 19/20 
rental income 7,500 less 25% eligible financing expenses  (60,000 x 2.5%) = 1,500 x 25% = 375
taxable profit 7,500 - 375 = 7,125 @ 40% = 2,850
less tax credit for 75% ineligible interest on financing costs (60,000 x 2.5%) = 1,500 x 75% = 1,125 x 20% = 225
net tax due 2,850 - 225 = 2,625

So your tax payable in 20/21 increases by from 2,625 to 2,700 ie + £75, not £1,000

(sense check, £375 of costs got 40% tax relief whereas under new rules it gets only 20% tax relief 375 x 20% = £75)

The_Palmist

oldbikebloke said:

The_Palmist said:

oldbikebloke said:

The_Palmist said:

Thanks and yes I get that now.

On a different note , with 2700 potential tax bill and more next year, I will be paying just over 10k in tax from rental property by 2023.
It is now looking very worth it to pay the penalty and fees for a new BTL mortgage with both our names on then do a DOT and not pay any extra tax.
Have I understood that correct.

sorry, I'm not following where you get £10k of tax from using the values mentioned so far. 
The illustration I did above is based on the full rate applicable from 6 April 2020 so why you think that will approximately quadruple in 2 years time needs further explanation from you 

First of all thank you for the time you and other forumites are taking to give guidance, it is much appreciated.
Ok so I calculated the overall tax paid to HMRC till the end of current fixed mortgage deal [till 2023]
April 2018 - 2019 - £1800 - paid
April 2019 - 2020 - approx £2500 - to pay
April 2019- 2021 - approx £3500 - to pay
April 2021 - 2021 - approx £3500 - to pay
April 2021 - 2021 - approx £3500 - to pay
April 2022 - 2023 - approx £3500 - to pay
So, my point was if it cost be £1800 get out fees + £1500 for a new mortgage + £250 for DOT, am I better off forking some money upfront and get it all done now rather than waiting for 2023. 
Now the risk is I am not sure if I will get a good deal BTL with Wife's name on. 
Hope that makes a bit of sense.

the only difference from 19/20 to 20/21 is one quarter of your mortgage interest charge no longer counts as a deduction from profit, so I don't see how you have a £1,000 uplift from a 60k mortgage unless you are using actual values significantly different to those previously shown?.

for 19/20 
rental income 7,500 less 25% eligible financing expenses  (60,000 x 2.5%) = 1,500 x 25% = 375
taxable profit 7,500 - 375 = 7,125 @ 40% = 2,850
less tax credit for 75% ineligible interest on financing costs (60,000 x 2.5%) = 1,500 x 75% = 1,125 x 20% = 225
net tax due 2,850 - 225 = 2,625

So your tax payable in 20/21 increases by from 2,625 to 2,700 ie + £75, not £1,000

(sense check, £375 of costs got 40% tax relief whereas under new rules it gets only 20% tax relief 375 x 20% = £75)

Got it, so even with the correct figures that's in excess of £10K paid in tax over next four years. Does it make sense to invest/spend a bit on new mortgage, DOT now. Given Mortgage value will be £65K there should be no SDLT issues.

D.L

Cash flow negative but you are making a profit. If that is an issue for your finances, you could switch to interest only.

The_Palmist

So I had filled a form at Sam Conveyancing and they replied with this, this suggests that I can go ahead with DOT, sounds too good to be true compared to what everyone has been saying here

"Thank you for your email and the Deed of Assignment can be used for legal/non legal owners so you can assign the beneficial interest on the property without your partner coming on to the mortgage.

Did you have any further questions? Is this something you would like to get underway?

 Kind regards,

 A Another Bsc (Hons)

Conveyancing Executive

SAM Conveyancing"