I currently live in a modest flat, and am looking to move into a new house in the next couple of months. I have had an offer accepted on the new house, and I have been accepted for a mortgage for it.
Because the mortgage I have on my current flat is relatively low, I have been thinking of converting the mortgage I have at the moment to a buy-to-let mortgage, and rent it out with the intention of it being an investment for the future.
What are the tax implications of doing this though? Will it be feasible to do this, or will I get hammered with a huge tax bill?
The tax implications are likely to be the least of your problems, all you do is pay income tax on the profit of your rental business, in other words all expenses relating to the rental property are deducted from your actual rental income, and you only get taxed on what's left. They include mortgage interest, insurance, agent's fees, repairs, maintenance, etc, etc.
When you convert the mortgage you should expect the interest rate to go up, and there is a commercial decision to be made here between (if appropriate) borrowing more money on your new house mortgage while paying more of the old flat's off, or doing the opposite. The BTL loan will have a higher interest rate, but each pound you pay will mean one less pound of rental income will be taxed. You can work out your own sums at leisure. There's probably not a lot in it, but remember that only the interest part of your loan payments is an allowable expense, the taxman will not subsidise actual paying off of your loan.
There is another tax implication as far as capital gains are concerned, but this will not become acute until at least 3 years after you move.
Bigger problems are: Will you be able to find tenants? If not, you'll be paying out expenses without rent coming in. Will you be able to fing
*suitable* tenants who won't trash the place? Will you be managing the thing yourself or making use of a letting agency? If the latter, they will cream off about 1/6 or 1/5 of the rent, severely reducing your profit margin, especially if it's tight. You need to make sure that your insurance remains valid, many insurers will only cover properties occupied by their owners, so you will need to find an insurer who offers landlord policies (thay can be difficult to find, but many letting agents are happy to act as insurance brokers even if you don't use them for a full management service.
Finally, would you be losing out if house prices drop significantly? You might be better off selling now for as much as you can get than in
3 years' time for 20% less. If prices do drop that much, then you're unlikely to recover that loss by rental profits in the meantime. On the other hand, if you stick at it for long enough, a drop before a recovery will mitigate CGT.
Ronald's provided a fairly comprehensive (if a little pessimistic) reply. If I may inject a slightly more positive note here....
You should never look at an investment solely from a tax perspective. Sure, get the grounding in what possible tax implications there are, but always look at the commercial fundamentals first. Ensure that you include all possible costs (including management of the tenancy, and expenditure to ensure the property complies with all tenancy regulations).
As Ronald stated, your existing mortgage will usually need to be converted into a BTL mortgage (check out your mortgage terms), which could be slightly higher than your existing one (you haven't provided too many details of your existing mortgage, but presumably you've taken advantage of the lower rates to remortgage at some stage within the last couple of years?)
Are you after rental yield, capital growth, or a mixture? Yields in the north of England are still anywhere up to 8%+, but in the south can be as low as 4%. If your equity is sufficient (and therefore your mortgage is lower) you can still turn a reasonable rental profit in the north, which will provide you with some comfort in the event of a rental void or a downturn.
I take Ronald's point that there is a possibility that your capital value will decline over the next year or two, and if you were to sell in three years' time you could be looking at a loss. However, you have stated that you would like to hang on to it as an "investment for the future". BTL should always be considered as at least 5 years, more likely ten, to catch the next up cycle before cashing in the equity.
If the investment pays for itself (i.e. good rental yield, after taking into consideration all costs including management of the property) then why not hang on to it for another ten years of so? After all, pick any year in the last 100 and ask yourself, how much was that house ten years ago?
Huh? Do you mean "pick any year in the last hundred and ask yourself how much any given house was worth ten years previously?"?
That is known as inflation my friend, you don't make money out of inflation. Besides if something has been increasing and increasing over a hundred years does that make it *more* or *less* likely it will increase during the next ten?
ROFL! Try telling that to someone who's owned a BTL for the last ten years. I'll grant you that the recent rises have been abnormal, but if I may put back in your judicious snipping: "If the investment pays for itself..." i.e. all costs are covered by the rental, then inflation most certainly is profit. It's called Capital Gain.
And if you're not going to tell that to someone who's owned a BTL, try telling it to the taxman. "Sorry guv, I haven't made any money on it, it's just inflation innit. No CGT here mate..."
Besides if something has been increasing and increasing
How can you tell whether all costs are covered by the rental, when the next roof will be needed, when you will be flooded or have a tenant who refuses to leave then leaves your property uninhabitable? How can you tell what changes in the laws and tax legislation may be round the corner?
You are looking backwards Shano, looking backwards isn't a guide to what you would see if you were able to look forwards.
It's still an inflation, house prices have to go up or down or stay the same, it just so happens that house prices have gone up as you say abnormally.
But have they gone up in every decade for the last century as you (in pidgin-speak) seemed to be saying? You may well be right, the other posters here seem to think wage inflation outpaces RPI (inflation) and house prices are coupled to wages. RPI goes back to 1948.
Now that Raygun has joined the thread, perhaps when he's stopped punching the air shouting "Nice one!" every time someone nearly scores a goal, he'll throw in his pennyworth.
In real terms? I don't know, I suspect they do, it always seems to me that prices at any rate are *falling*, not just baked beans and tinned tomatoes but electrical goods and cars.
Here's another of Shano's words of wisdom:
"BTL should always be considered as at least 5 years, more likely ten, to catch the next up cycle before cashing in the equity"
Absolute bollox. If you see half a likelihood of a trough coming then Nationwide InvestDirect was made for you. Troughs can only follow crests and can only be followed by troughs.
If I buy a house for £1m and sell it 10 years later for £2m and have to pay £50K CGT on my "profit", then I'm a bloody fool if agricultural land has increased twenty fold, shares three fold, and all I have is the same house I started with worth exactly the same as it was the day I bought it *and* I've a £50K "loss" to swallow on my so-called profit.
There wouldn't be any increases in the standard-of-living otherwise!
"Troy Steadman" wrote
Obviously (2). But try qualifying it with "have house prices gone up over each consecutive period of ten years over the last fifty years" and the answer is likely (1).
Things move in cycles. Troughs follow crests, crests follow troughs. But of course the length of the cycles may be such that 5 or 10 years will only get you from the fire into the frying pan.
You might skip a trough and end up on a bigger or smaller crest than one you started from. You might skip a crest and end up in a shallower trough.
Okay but have you ever ridden "The Big One" at Blackpool? You go up and up, looking back you see the queue, look back next time you see the building, look again you see the entire Pleasure Park, next time you see the entire Blackpool promontory lights twinkling.
I repeat "looking backwards isn't a guide to what you would see if you were able to look forwards".
(1) I very deliberately missed out the word "real" in my comment. *Now* - does Daytona's s/s suggest "otherwise" (in the context of nominal prices)? I suggest not (even without looking!).
(2) Change the time-frame from 10 years to (say) 16 years, and what is the position - even with real prices?
I think you're flogging a dead horse. If there are waves, of indeterminate frequency and several of them superimposed, then no matter how long you make your ruler, sometimes it will be sloping up and sometimes down.
Moreover, if the long-term average is flat, the ruler will slope down as often and as much as up.
That only makes a difference if you look to the future. We're talking about the past century - which is now fixed in stone.
Can you find a period of sixteen years in the last century when the historic figures show a fall in real prices? Even if you can - can you do so for a period of 25 years? I think not!
"Ronald Raygun" wrote
The long-term average over the last century has definitely *not* been flat!
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