To BTL or not to BTL, that is the question

maxxpayne

Hello,

We're planning to let to buy. Basically put our current property (a flat) on BTL mortgae and then buy a second home (a house). 

However, this is no longer as strightforward as we originally thought, especially with the stamp duty (SDLT) increates in October.

At a glance:

The flat: Estimated value 480k. 

This is purely based on a couple of estate agents viewing the flat and givng us estimates. The local council (Islington) has offered us 450k (maximum allowed for purchase for a 2 bed) also. The value of the flat has more than doubled in the last 10 years and we expect that the trend will continue, it being in a good location in Islington. It also has only 105k outstanding mortgage balance, which allows us to extract better equaity via BTL (see below)

The house: Estimated at 570k. 

There's a catch though, it requires extensive refurbishment, around 110k in our estimate including a 3 metre extension.

If we BTL:

 

Pros:

• We think that we can extract 220k in equity from the flat after re-mortgate to BTL
• We can get an interest only mortgage at 1100 PCM and rent out 2000PCM (estate agent estimated 2400, but I'm doing conservative estimates)
  
• We get 500/month after taxes etc. from the flat
• We get to stay in our flat during renovation takes place in the house, which would be 3-5 months
• We get to maintain an additional property for our young children
  

Cons:

• Stamp duty up from 16250 to 45000. Extra cost of 28750. That's 5 years of rental income from the BTL
  
• 220k from BTL equity gives us a repayment rate of 1800PCM or 1300PCM when BTL income factored in
  
• Will need to pay mortgage on both properties while house refurbishing happens

If we sell:

Pros:

• We extract 343k (assuming we sell at 450k)
• Stamp duty 16250
• Deposit to new house 371k (we also add the 28750 that we'd have paid in additional stamp duty to the mortgage)
• Repayment mortgate is now 1053PCM, 250PCM cheaper than BTL
  

Cons:

• Because the new place requires refurbishement, we need to find temp accomodation for 3-5months costing around 10000-12000
  
• There's no second property

So question is what would you do? What should I do?

Dazed_and_C0nfused

Do you fully understand the rules now regarding letting and finance costs and how they cannot be claimed as an expense?

You can probably get some tax relief (as a tax reducer) but it's not as simple as it once was.

maxxpayne

Dazed_and_C0nfused said:

Do you fully understand the rules now regarding letting and finance costs and how they cannot be claimed as an expense?

You can probably get some tax relief (as a tax reducer) but it's not as simple as it once was.

I’m not aware of any changes. This is what I’ve assumed as a higher rate tax payer:

- I can claim basic rate relief on the interest only mortgage 
- I can include service charge, maintenance free and travel costs as expenses 

All based on guide at https://www.freeagent.com/apps/landlords-allowable-expenses-calculator/

In my case I’ll have to pay tax on 4800 net income after expenses every year. If I can transfer the income against my wife’s name I can probably end up saving even more tax?

TheSpectator

maxxpayne said:

Dazed_and_C0nfused said:

Do you fully understand the rules now regarding letting and finance costs and how they cannot be claimed as an expense?

You can probably get some tax relief (as a tax reducer) but it's not as simple as it once was.

I’m not aware of any changes. This is what I’ve assumed as a higher rate tax payer:

- I can claim basic rate relief on the interest only mortgage 
- I can include service charge, maintenance free and travel costs as expenses 

All based on guide at https://www.freeagent.com/apps/landlords-allowable-expenses-calculator/

In my case I’ll have to pay tax on 4800 net income after expenses every year. If I can transfer the income against my wife’s name I can probably end up saving even more tax?

How are you getting to £4800 net income a year from your share of £12,000?

maxxpayne

TheSpectator said:

maxxpayne said:

Dazed_and_C0nfused said:

Do you fully understand the rules now regarding letting and finance costs and how they cannot be claimed as an expense?

You can probably get some tax relief (as a tax reducer) but it's not as simple as it once was.

I’m not aware of any changes. This is what I’ve assumed as a higher rate tax payer:

- I can claim basic rate relief on the interest only mortgage 
- I can include service charge, maintenance free and travel costs as expenses 

All based on guide at https://www.freeagent.com/apps/landlords-allowable-expenses-calculator/

In my case I’ll have to pay tax on 4800 net income after expenses every year. If I can transfer the income against my wife’s name I can probably end up saving even more tax?

How are you getting to £4800 net income a year from your share of £12,000?

This is how I’m doing it:

Rent: 2000x12 = 24,000
Interest: 1100x12 = 13,200 
Service charge: 230x12 = 2,760 
Insurance/maintenance: 50x12 = 600 
Income: 24000-13200-2760-600 = 7,440 
Taxable income: 7440-6000=1,440 
Tax: 1440x.45=648 
Total: 7440-648=6,792 

Ok so it’s actually 6792?

Spinybif

Only a company gets tax relief on a buy to let mortgage. As an individual or couple you will be liable for tax on the rental income used to pay the mortgage - that will add another £5940 to your tax bill. Also £50 per month on a flat renting for £2000pm is unrealistically low. Add in void periods and cost of letting agent to manage or at least screen applicants and you will be lucky to break even.

The hassle may be worth it for the long term capital gain but that also will be taxable. 

silvercar

maxxpayne said:

TheSpectator said:

maxxpayne said:

Dazed_and_C0nfused said:

Do you fully understand the rules now regarding letting and finance costs and how they cannot be claimed as an expense?

You can probably get some tax relief (as a tax reducer) but it's not as simple as it once was.

I’m not aware of any changes. This is what I’ve assumed as a higher rate tax payer:

- I can claim basic rate relief on the interest only mortgage 
- I can include service charge, maintenance free and travel costs as expenses 

All based on guide at https://www.freeagent.com/apps/landlords-allowable-expenses-calculator/

In my case I’ll have to pay tax on 4800 net income after expenses every year. If I can transfer the income against my wife’s name I can probably end up saving even more tax?

How are you getting to £4800 net income a year from your share of £12,000?

This is how I’m doing it:

Rent: 2000x12 = 24,000
Interest: 1100x12 = 13,200 
Service charge: 230x12 = 2,760 
Insurance/maintenance: 50x12 = 600 
Income: 24000-13200-2760-600 = 7,440 
Taxable income: 7440-6000=1,440 
Tax: 1440x.45=648 
Total: 7440-648=6,792 

Ok so it’s actually 6792?

Rent: 2000x12 = 24,000
Interest: 1100x12 = 13,200 
Service charge: 230x12 = 2,760 
Insurance/maintenance: 50x12 = 600 
Income exc mortgage interest: 24000-13200-2760-600 = 20,640
Tax: 20,640 x .45=9288
Finance costs allowed at basic rate 13200x 0.2= 2640
tax=9288-2640=6648
Total: 20640-6648-13200=792.

kingstreet

Based on a quick calculation with the Mortgage Works, you'll need to use a five year fix to generate the £330k you'll need to borrow on the LTB using your estimated £2k monthly rent. The current TMW rate is 4.56% with £1,495 fee and the monthly cost £1,248 so your £1,100 cost may be ambitious.

maxxpayne

I'm glad I asked. Appreciate the response. So researching this further, I have the following two options:

1. Switch to a limited company
2. Assign the income to my partner who is a basic tax payer

Here's income calculation based on my partners salary. If I put down my income, it's 798, which lines up with your calculations.

At least that makes it viable?

silvercar said:

maxxpayne said:

TheSpectator said:

maxxpayne said:

Dazed_and_C0nfused said:

Do you fully understand the rules now regarding letting and finance costs and how they cannot be claimed as an expense?

You can probably get some tax relief (as a tax reducer) but it's not as simple as it once was.

I’m not aware of any changes. This is what I’ve assumed as a higher rate tax payer:

- I can claim basic rate relief on the interest only mortgage 
- I can include service charge, maintenance free and travel costs as expenses 

All based on guide at https://www.freeagent.com/apps/landlords-allowable-expenses-calculator/

In my case I’ll have to pay tax on 4800 net income after expenses every year. If I can transfer the income against my wife’s name I can probably end up saving even more tax?

How are you getting to £4800 net income a year from your share of £12,000?

This is how I’m doing it:

Rent: 2000x12 = 24,000
Interest: 1100x12 = 13,200 
Service charge: 230x12 = 2,760 
Insurance/maintenance: 50x12 = 600 
Income: 24000-13200-2760-600 = 7,440 
Taxable income: 7440-6000=1,440 
Tax: 1440x.45=648 
Total: 7440-648=6,792 

Ok so it’s actually 6792?

Rent: 2000x12 = 24,000
Interest: 1100x12 = 13,200 
Service charge: 230x12 = 2,760 
Insurance/maintenance: 50x12 = 600 
Income exc mortgage interest: 24000-13200-2760-600 = 20,640
Tax: 20,640 x .45=9288
Finance costs allowed at basic rate 13200x 0.2= 2640
tax=9288-2640=6648
Total: 20640-6648-13200=792.

kingstreet

SDLT on transferring into Ltd Co;-

https://www.hwca.com/accountants-chester/opinion/can-you-transfer-personal-property-into-a-limited-company/

TheSpectator

I think OP has already convinced themselves that letting the flat is the way to go.

Think you need to go back and do some more research as to potential costs/obligations. Transferring to Ltd comes with it's own complications and issues on raising funds.