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Tax Efficient BTL Mortgages

BTL mortgages work in a different way to standard residential mortgages in the UK. Lenders have specific criteria to assess the BTL mortgage applications. You need to consider factors such as income tax on rental income, submitting self-assessment tax returns to HMRC, stamp duty implications, and capital gains tax if applicable.

How to understand the tax on rental income?

If you are planning to become a landlord in the future, you must be very interested to learn the income tax implications on your rental income. The answer is simple, the landlords must pay income tax on the profit that you made on rental income from all rented properties in the UK. Certain expenses are allowable to be deducted. Further, there are certain allowances as well.

What is the revenue from my BTL property?

There is a common misconception that only the monthly rental payment is considered as the revenue for tax purposes. There are few other cash inflows such as repairs, utility payments covered by the tenants, that are considered as part of revenue. It is important that you understand this and check with the accountant when submitting the self-assessment tax returns to HMRC.

If you are planning to charge a non-refundable deposit from the tenants, it will also be counted as part of the revenue from the property. Therefore, it is important to have a qualified accountant on your side to submit the proper tax returns with the correct treatment!

Do I need to plan for Capital Gains Tax?

If you are planning to sell a BTL property, the gains are subject to tax. It is advisable to speak to a tax-efficient mortgage adviser to understand the implications of capital gains tax and tax-free allowance. You should consider capital gains tax implications as it affects the sustainability of the BTL property portfolio in the long run. If you are a landlord planning to buy and sell properties regularly, it would be an added benefit to knowing this area.

High-rate taxpayers and mortgage interest tax relief

As per the recent tax legislation, you can no longer deduct any amount of your mortgage expenses from rental income. Landlords used this as an effective strategy to reduce your tax bill.  However, they can’t do it anymore due to the recent change in the tax system!

The new relief would be a tax credit of 20% of your mortgage interest payments. Unfortunately, this is not in the best interest of the high-rate taxpayer. They were capable of claiming 40% of the mortgage interest with the previous tax legislation. Now, they can only claim 20% and it has motivated the high-rate taxpayers to consider alternative strategies in terms of BTL property ownership. It has been a major reason behind the increasing popularity of limited company BTL purchases.

The rise of limited company BTL purchases

The limited company BTL mortgages have huge demand in the market. If you are a high-rate taxpayer and planning to build a portfolio of BTL properties in the future, it would be the right time to discuss your plans with a specialist BTL mortgage adviser. They would help you to select the suitable route to own the property, whether in your name or limited company ownership. As discussed above, the high rate-tax payers would be able to deduct the full mortgage interest from the taxable amount if they own the BTL property via a limited company. Further, the rental income would be subject to corporate tax which makes the tax bill cheaper than the personal route.

What are my allowable expenses?

You can claim the expenses of running and maintaining your BTL property. It effectively brings down your tax bill.  If the monthly rental income you receive from the tenant covers your water, gas, electricity, and council tax, you should consider them in the revenue. On a positive note, you can claim the costs you pay as an expense.  

Some examples of allowable expenses you can claim are:

  • water rates, council tax, gas, and electricity
  • landlord insurance
  • costs of services, including the wages of gardeners and cleaners (as part of the rental agreement)
  • fees of the estate agent and accountant
  • legal fees for lets of a year or less, or for renewing a lease of fewer than 50 years
  • rents, ground rents, and service charges
  • direct costs such as phone calls, stationery, and advertising for new tenants

If you own the BTL property via a limited company, the solicitor would check whether you have home insurance/landlord insurance in place. The insurance would also be set up in the name of the limited company which makes things more transparent for tax purposes.

How to receive tax-efficient BTL mortgage advice?

Tax-efficient BTL mortgage advisers are the best people to help you with planning your BTL portfolio. They will consider the return on investment in the long run to evaluate the suitable option for you. Further, they understand the cost of financing and the practical implications of BTL property transactions. You should set an appointment with a tax-efficient mortgage adviser to get your journey started!  

As a mortgage is secured against your home, it could be repossessed if you do not keep up with the mortgage repayments.

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Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of our Independent Mortgage Brokers to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisers working for or with Independent Mortgage Brokers are fully qualified to provide mortgage advice and authorised and regulated by the Financial Conduct Authority. All our independent Mortgage Brokers will offer advice specific to you and your needs and circumstances. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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