Renting out residential property - tax!

stig22

Hi,

I am currently faced with a situation where I may need to rent out of my property due to moving with my job. I am currently on a residential mortgage and I would look to rent once I have consent from my lender. I'm struggling to understand the tax situation and whether this is feasible without losing considerable money. Below are my calculations based on new legislation of 20% tax credit for finance costs (over a year if I let out at £1450 a month):

Rental income - £17,400
Mortgage interest - £7,200
Other costs (Landlord insurance) - £480
Total costs - £7,680
20% of total costs (tax credit)- £1,536

Profit = Income minus 20% tax relief - £15,864
Tax (40% of profit) = £6,345.6

Can anyone with experience in this confirm if this looks correct? My main issue is my mortgage repayments are £1300 a month so after I've paid taxes I'd actually be about £4.5k down over a year!

Any help very much appreciated. I'm no tax expert and hadn't planned on being in this situation so desperately trying to understand how best to work this out.

Slithery

Are you ignoring tenant referencing, contract setup fees, maintenance, deposit protection, 2 months of voids per year, EA fees, etc from your other costs for a reason?

Thrugelmir

stig22 wrote: »

Can anyone with experience in this confirm if this looks correct? My main issue is my mortgage repayments are £1300 a month so after I've paid taxes I'd actually be about £4.5k down over a year!

Hence why BTL mortgages are predominantly interest only. With the focus on capital gain. Rental yields aren't high enough to support sizable repayment mortgages.

G_M

EPC, gas report, electric report, boiler breakdown/service, smoke detectors (if not there), inventory....

00ec25

stig22 wrote: »

Hi,

I am currently faced with a situation where I may need to rent out of my property due to moving with my job. I am currently on a residential mortgage and I would look to rent once I have consent from my lender. I'm struggling to understand the tax situation and whether this is feasible without losing considerable money. Below are my calculations based on new legislation of 20% tax credit for finance costs (over a year if I let out at £1450 a month):

Rental income - £17,400
Mortgage interest - £7,200
Other costs (Landlord insurance) - £480
Total costs - £7,680
20% of total costs (tax credit)- £1,536

Profit = Income minus 20% tax relief - £15,864
Tax (40% of profit) = £6,345.6

Can anyone with experience in this confirm if this looks correct? My main issue is my mortgage repayments are £1300 a month so after I've paid taxes I'd actually be about £4.5k down over a year!

Any help very much appreciated. I'm no tax expert and hadn't planned on being in this situation so desperately trying to understand how best to work this out.

so you are already a 40% taxpayer?
so you already earn at least £50,000 per year yet can't understand the difference between interest and capital repayment?

how will you be "down" when your personal wealth has increased by ( 1,300 x 12 ) - 7,200 = 8,400 per year ?
On none of which will you pay any income tax, since that is capital loan paid off, ie increased personal net wealth.

you also need to re-read the mechanics of the tax calc as you have got it wrong. Your tax payable would be £5,328, not 6,345
https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies

theartfullodger

Don't assume rent is paid. You may get tenant-from-hell (or agent-from..) who doesn't pay for 7 months whilst you keep paying mortgage etc & repair & legal costs to evict.

Repair costs, Well, yes, unless you want judge to decide you are harassing tenant and give them more time.

Do you have the financial AND emotional reserves to cope?

Most years I make money from letting each property:. But not always

Oh, and think about other taxes: There are at least 10 taxes a landlord may pay.

Welcome to the fun world of landlording

AdrianC

stig22 wrote: »

I am currently faced with a situation where I may need to rent out of my property due to moving with my job.

You don't NEED to rent it out.

You could sell it.

Do you even WANT to enter the residential lettings business?
If you do, then is this the right property, in the right location?
Do the numbers add up? Well, clearly - no, they don't.

So why are you even entertaining the idea of starting this business?

Cakeguts

Sell the house. You didn't buy it as a rental so you may have got a house that theoretically lets for £1450 pcm but in practice doesn't. The problem is that if it isn't the sort of house that people will pay £1450 pcm to rent it is going to be vacant a lot.

stig22

Thanks all and apologies if a slightly naive question, very new to this and trying to get my head around it.

The issue with selling is I am only a year into a 2 year fixed rate mortgage (hadn't anticipated selling within the 2 years) so looking at an early repayment fee. Guess it's balancing that up versus the cost of renting...

foxy-stoat

Question 1 - do you want to be a landlord?
Question 2 - do you know how to be a landlord?

Its not all about tax. Your rental income needs to be 140% more than your mortgage payments as a start. Its a non starter just based on the rental income.

You will get £17,400 per year income (assuming no voids or repairs)
You will pay £15,600 in mortgage payments a year, plus other expenses.

You will be working for the HMRC - just sell it and invest the equity if you are going to rent. Please dont put it in Premium Bonds, it will reduce my chances of winning.

theartfullodger

....or the losses from damage & no rent payment...