Rental Property - Hints and Tips please.
Discussion
Apologies if this has come up before, and it is bound to have done, but the search is broken and the google one didn't find anything.
Pondering the most tax efficient way to rent a house out and what the best practices are.
A few questions......
1.Is it best to go interest only or repayment? If the rental income didn't cover the rental income it could be topped up (also any period of vacancy could be covered). Also, in a flat market it would seem repayment is the best way to go to maximise yield?
2.Looking at the direct gov website, it suggests any income left over after interest can be offset against a raft of allowable expenses i.e. there would be no tax after all expenses are taken in to account.
3.Based on the above, is it wise to shorten the mortgage term, hence increasing the interest due, and therefore the expenses, in order to pay the house of sooner and realise the yield on the investment.
4.In terms of capital gains, the gain would be based on the house value at the point the mortgage was taken, correct?
Any pitfalls one should be aware of?
Pondering the most tax efficient way to rent a house out and what the best practices are.
A few questions......
1.Is it best to go interest only or repayment? If the rental income didn't cover the rental income it could be topped up (also any period of vacancy could be covered). Also, in a flat market it would seem repayment is the best way to go to maximise yield?
2.Looking at the direct gov website, it suggests any income left over after interest can be offset against a raft of allowable expenses i.e. there would be no tax after all expenses are taken in to account.
3.Based on the above, is it wise to shorten the mortgage term, hence increasing the interest due, and therefore the expenses, in order to pay the house of sooner and realise the yield on the investment.
4.In terms of capital gains, the gain would be based on the house value at the point the mortgage was taken, correct?
Any pitfalls one should be aware of?
ferrisbueller said:
Apologies if this has come up before, and it is bound to have done, but the search is broken and the google one didn't find anything.
Pondering the most tax efficient way to rent a house out and what the best practices are.
A few questions......
1.Is it best to go interest only or repayment? If the rental income didn't cover the rental income it could be topped up (also any period of vacancy could be covered). Also, in a flat market it would seem repayment is the best way to go to maximise yield?
2.Looking at the direct gov website, it suggests any income left over after interest can be offset against a raft of allowable expenses i.e. there would be no tax after all expenses are taken in to account.
3.Based on the above, is it wise to shorten the mortgage term, hence increasing the interest due, and therefore the expenses, in order to pay the house of sooner and realise the yield on the investment.
4.In terms of capital gains, the gain would be based on the house value at the point the mortgage was taken, correct?
Any pitfalls one should be aware of?
Tax efficiency is in my opinion only part of the question here and the best way to be tax efficient probably depends on what type of business you are looking for. I live outside the UK and kept on my old house as an insurance investment. My rental income more than cover the cost of the mortgage which is pretty small now and so I go repayment which to me means that I am more and more safe which was the goal of the exercise. Pondering the most tax efficient way to rent a house out and what the best practices are.
A few questions......
1.Is it best to go interest only or repayment? If the rental income didn't cover the rental income it could be topped up (also any period of vacancy could be covered). Also, in a flat market it would seem repayment is the best way to go to maximise yield?
2.Looking at the direct gov website, it suggests any income left over after interest can be offset against a raft of allowable expenses i.e. there would be no tax after all expenses are taken in to account.
3.Based on the above, is it wise to shorten the mortgage term, hence increasing the interest due, and therefore the expenses, in order to pay the house of sooner and realise the yield on the investment.
4.In terms of capital gains, the gain would be based on the house value at the point the mortgage was taken, correct?
Any pitfalls one should be aware of?
As it's only the interest part of the mortgage payment and not the repayment element which is possible to set off against tax this is certainly not the most tax efficient way to do things but as some other expenses such as agents fees are also permissible I wouldn't normally end up paying a lot of tax on it even if I lived in the UK.
On the other hand I'm now at the point where I have so much equity and feel fairly confident abroad (at least until Sunday) that I'm starting to wonder if I shouldn't take out some equity from this house to use as a deposit on a second property. If I go down this route I would probably still choose some repayment element on one of the mortgages so that I could continue the process. This would only be possible otherwise (with interest only) if I thought house prices would be going up quickly so that I could repeat the process and keep a similar percentage equity level but I'm not confident of that today.
Effectively (and ethically though there's probably a legal loophole) you can only really make repayments if you make a profit from renting and therefore any profits that you made would be taxable. So yes it might be possible to borrow interest only and only make the interest payments and leave you with no tax to pay but you would need first to find someone willing to lend you that much and secondly you wouldn't be gaining anything unless house prices were going up.
Capital gains calculations are normally based on dates of change of ownership but there are a variety of exceptions and legal loopholes to reduce it's impact.
ferrisbueller said:
3.Based on the above, is it wise to shorten the mortgage term, hence increasing the interest due, and therefore the expenses, in order to pay the house of sooner and realise the yield on the investment.
Shortening the mortgage term wont make a jot of difference to the interest due. It will make the capital portion of a mortgage payment higher, but that cannot be offset agianst tax. The vast majority of BTL's are set up as interest only loans.
swerni said:
Pitfalls
Being investigated for tax evasion.
Other than that, a sound business model.
Generally, or something specific in what I've asked? My questions are based on what I've read on the direct gov website. There are plenty of options if the above questions aren't a correct interpretation of the rules. Being investigated for tax evasion.
Other than that, a sound business model.
In simple terms, Capital Gains Tax is charged on the difference between sale proceeds of the property less the original purchase cost of the property.
In practice, of course, matters are rather more complicated.
The original cost of the property is the actual amount paid plus all legal fees, stamp duties and other charges incurred at the time of purchase.
Later "Enhancement Costs" i.e. major capital expenditure on the property, is also added to the original cost when computing the capital gain.
Sales proceeds are the actual selling price of the property less any charges, fees etc incured at the time of the sale.
As you can see, it is vital that all purchase and sale documentation and records needs to be retained safely by the owner over the ownership period of the property - which could be many years, even decades.
If the property is jointly owned, the Capital Gains arising on the sale or disposal of the propert is split between the owners.
Also, individuals have an annual Capital Gains Allowance which currently stands at £10,600. In the year of disposal, the allowance is offset against the gain before tax is calculated. Obviously, if there are multiple owners, each individual gets to use their Capital Gains Allowance.
In practice, of course, matters are rather more complicated.
The original cost of the property is the actual amount paid plus all legal fees, stamp duties and other charges incurred at the time of purchase.
Later "Enhancement Costs" i.e. major capital expenditure on the property, is also added to the original cost when computing the capital gain.
Sales proceeds are the actual selling price of the property less any charges, fees etc incured at the time of the sale.
As you can see, it is vital that all purchase and sale documentation and records needs to be retained safely by the owner over the ownership period of the property - which could be many years, even decades.
If the property is jointly owned, the Capital Gains arising on the sale or disposal of the propert is split between the owners.
Also, individuals have an annual Capital Gains Allowance which currently stands at £10,600. In the year of disposal, the allowance is offset against the gain before tax is calculated. Obviously, if there are multiple owners, each individual gets to use their Capital Gains Allowance.
scotal said:
The vast majority of BTL's are set up as interest only loans.
On a £100k loan the difference between an interest-only and repayment monthly figure seems to be approx £140 (more for the repayment). So for example - £140 x 300 = £42,000. Am i missing something?... at the end of the term (25 yrs) you either owe £100k (interest-only loan) or, for that extra £140 per month, the whole of the property is yours. No £100k to repay!
I'm sure i have the wrong end of the stick so happy to be put right, or educated, into why the interest-only route is favorable. I genuinely just don't understand why one wouldn't pay a little extra for zero risk and full ownership of property.
Ta
ferrisbueller said:
swerni said:
Pitfalls
Being investigated for tax evasion.
Other than that, a sound business model.
Generally, or something specific in what I've asked? My questions are based on what I've read on the direct gov website. There are plenty of options if the above questions aren't a correct interpretation of the rules. Being investigated for tax evasion.
Other than that, a sound business model.
HMRC does have a "random" option for starting an investigation but it is rarely used. Most investigations are triggered by obvious or apparent anomalies in the data submitted on the return.
Phooey said:
scotal said:
The vast majority of BTL's are set up as interest only loans.
On a £100k loan the difference between an interest-only and repayment monthly figure seems to be approx £140 (more for the repayment). So for example - £140 x 300 = £42,000. Am i missing something?... at the end of the term (25 yrs) you either owe £100k (interest-only loan) or, for that extra £140 per month, the whole of the property is yours. No £100k to repay!
I'm sure i have the wrong end of the stick so happy to be put right, or educated, into why the interest-only route is favorable. I genuinely just don't understand why one wouldn't pay a little extra for zero risk and full ownership of property.
Ta
In addition to the interst payments, the borrower will also be paying an additional monthly premium in respect of the annuity/pension/insurance product.
When the full term of the loan is ended (say 25 years), the annuity/pensiom/insurance policy is "cashed in" and the capital sum generated on the maturity of the policy is sued to clear the capital sum owed on the mortgage.
The big risk with such mortgages is that the financial product may not perform as originally expected over the 25 years and when it is cashed in, the lump sum on maturity may not be large enough to clear the mortgage amount still outstanding. This has been the case with many such arrangements.
Ah i see. Thank you for taking the time to explain, Eric.
Eric Mc said:
The big risk with such mortgages is that the financial product may not perform as originally expected over the 25 years and when it is cashed in, the lump sum on maturity may not be large enough to clear the mortgage amount still outstanding. This has been the case with many such arrangements.
^^^And this would be exactly my concern too. Repayment seems a no-brainer - certainly at today's interest rates anyway.Phooey said:
^^^And this would be exactly my concern too. Repayment seems a no-brainer - certainly at today's interest rates anyway.
Whilst Eric's explanation of how Interest Only mortgages work in theory is correct, it is only really applicable to residential mortgages. The reason why a lot of BTL mortgages are on Interest Only is so that the monthly payment fits within the lenders criteria.
Most lenders will expect approx 125% rental over the mortgage payment. So for example;
a £400 per month Interest only mortgage payment, will require at least £500 to be recieved in rent.
Yes, a repayment mortgage would be advisable, but what if that payment is then £490 a month and your only getting £500 in rent? It now doesn't fit the lenders criteria.
Most people will overpay their Interest Only mortgages or cite 'Sale of the property' as the repayment vehicle, which most BTL lenders will accept.
Sarnie said:
Whilst Eric's explanation of how Interest Only mortgages work in theory is correct, it is only really applicable to residential mortgages.
The reason why a lot of BTL mortgages are on Interest Only is so that the monthly payment fits within the lenders criteria.
Most lenders will expect approx 125% rental over the mortgage payment. So for example;
a £400 per month Interest only mortgage payment, will require at least £500 to be recieved in rent.
Yes, a repayment mortgage would be advisable, but what if that payment is then £490 a month and your only getting £500 in rent? It now doesn't fit the lenders criteria.
Most people will overpay their Interest Only mortgages or cite 'Sale of the property' as the repayment vehicle, which most BTL lenders will accept.
Thanks for the explanation Sarnie. Makes sense re lending criteria.The reason why a lot of BTL mortgages are on Interest Only is so that the monthly payment fits within the lenders criteria.
Most lenders will expect approx 125% rental over the mortgage payment. So for example;
a £400 per month Interest only mortgage payment, will require at least £500 to be recieved in rent.
Yes, a repayment mortgage would be advisable, but what if that payment is then £490 a month and your only getting £500 in rent? It now doesn't fit the lenders criteria.
Most people will overpay their Interest Only mortgages or cite 'Sale of the property' as the repayment vehicle, which most BTL lenders will accept.
Apologies to the OP for the thread hijack
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