Buy to let mortgage and income tax?

anders88

Hi,

I am considering investing some of my savings in to a buy-to-let property and was wondering if anyone had any advice they may be able to offer as I am very new to this, I have had a read through the info on the forum and it all seems very complex. Apologies if this has already been covered.

I am currently looking at a property value at around 80k and have been informed there is a tenant currently in situ paying £425pcm. I would be looking to put down a 20k deposit so would need a buy to let mortgage. I have had a look at interest rates available and it looks like there are some available at around 1.55%.

My main question is around tax as I hadn’t really considered this before but from research it looks like even when mortgaged you have to pay tax on rent (minus interest), has anyone got any experience or info regarding this as not sure if it would be worth the investment or more trouble than it is worth. I earn around 45k but this will rise to about 50 in a couple of years where as my wife earns 27k, therefore not sure if this would have an impact or whether a joint income would be considered before a higher tax bracket would apply to any rental income.

All comments welcome and I appreciate any help offered.

Thanks,

Andy

Keswick1uk

You pay tax on rental income less costs like insurance, gas check, repairs and agents fees for rent collection. If its in your name the whole of this profit is added to your income and this may be at higher rates when your employment income increases. You will need to do a tax return as the income is over £1000  per annum.

Interest is then deducted but only at 20 percent tax relief. So , when a basic rate taxpayer in total this rule makes little difference. It makes a big difference when you become a higher rate payer.

You may also find it affects the child benefit you can claim as well. Once your income rises over 50k there is a clawback started on child benefit paid.

AdrianC

£80k property, £425/mo rent is 6.3% yield! Woohoo!

Except...
Take off ~15% of rent for bad debts, maintenance, voids, etc.
Take off your £77/mo mortgage interest. (How much when that 1.55% rate ends?)
Are you paying for management, or fielding the 3am "Boiler's exploded!" calls yourself? If paying, that's another 10%.
So you're down to £240/mo actual income. 3.6%. On which you're paying tax. So about £200/mo in your pocket. 3%. Before you hit the higher rate threshold.

That's not a great return, really, is it?
One year just to pay off the +3% SDLT, before you see a single penny in your actual pocket. So over the first two years, you're looking at an aggregated 1.5% return, three years 2%.

And that's assuming no tenants that monumentally take the mick, finally doing a runner on the eve of the possession hearing, leaving you a trashed ruin with two or more years of unpaid rent.

And with a sitting tenant... Are you sure all the immovable ducks are in a row for s21 purposes? Is this a tenant you'd actually choose yourself?

steampowered

BTL is not a good option for higher rate tax payers. It doesn't have a great return and is massively tax inefficient.

As a higher rate tax payer, you should be making the most of your ability to claim higher rate tax relief on your pension contributions, and investing £20k per year into a stocks & shares ISA, before you even consider BTL.