UK Landlord Forum / Life

Hi guys, thank you for a great forum.

I've got a sick feeling that we are about to jump onto the landlord band wagon at the worst time possible.  I have a disability and find it somewhat hard to understand the tax changes that are about to be implemented and hope someone can help me with our situation.

Here is our current situation:-
Myself and my wife work and earn a combined income of only £18K (£13k for me & £5k for my wife)
We have four children (3 under 16 and 1 over 16)
Working Tax Credits: Approx £5000
Child Tax Credits: Approx £10000


My bank has approved a Let to Buy mortgage of £50k (interest only) for our current property as we wanted to move to a better location as where we currently live...well lets say is not safe for our kids. This £50k will be used as a deposit for the 2nd property we are currently in the process of purchasing.

I estimate that we expect a max rental income of approx £5000 per year before any expenses, so if you can base any calculations on this sum, then it would be much appreciated.

The problem is that only now it's beginning to sink in that I'm worried about how the tax & tax credit changes will affect us. Could anyone please help me? If there is anything I have not explained, please let me know.

Thank you.

As far as I am aware you can only claim 20% tax relief on the rental income.  This is how it was before unless you are a higher rate tax payer.  As a higher rate tax payer you were able to claim the full tax allowance (40%) but can now only claim 20% so it will cost you 20% more tax.  From the figures you've given I can't see this as the problem.  How your benefits are affected, I don't know. 

Quote from: Riptide on September 15, 2015, 08:25:27 PM
As far as I am aware you can only claim 20% tax relief on the rental income.  This is how it was before unless you are a higher rate tax payer.  As a higher rate tax payer you were able to claim the full tax allowance (40%) but can now only claim 20% so it will cost you 20% more tax.  From the figures you've given I can't see this as the problem.  How your benefits are affected, I don't know.

Thank you for your reply Riptide.  I'm sure I read somewhere that even those in the 20% tax would be pushed into the 40%.

I really would appreciate it if the following questions can be answered:-

1. Would the tax change mean that I couldn't claim tax relief on the 50K interest only mortgage?
2. Using my first post figures, could you please help me calculate the amount of tax??
3.How could I find out how much my working and child tax credits would be??

Thank you again

I hope you dont mind me asking, but why are you doing this?

You can claim all the interest on the new mortage against your £5k income, leaving £2500 "profit" This will be taxed at 20%, so extra tax of £500.

https://www.gov.uk/government/publications/tax-credits-entitlement-table-working-at-least-16-hours-and-no-childcare/tax-credits-entitlement-table-working-at-least-16-hours-and-no-childcare

You could have googled that too, but I would guess earning an extra £2500 will cost you £1000 a year in reduced benefits, so your hard work effort and risk is going to bring you £30 a week extra.

Still if you save it up, you could pay off your mortgage in 32 years!

So in short.

Interest only mortgages are really rather ... this is my opinion only.... Stupid.

Having the hassle of tenants in a rough area is a real headache.

The average cost of a "do up" after tenants leave is £4000, are you ready for that?

You are doing all this for £4 a day......................................... Why dont you just change your brand of coffee?

Just sell the house?

You don't seem to want to become a Landlord? If you don't, then don't... it's hardly any fun and lots of hassle.

Thank you boboff and Hippogriff for your replies.

@ boboff :-

Please correct me if I'm wrong, but isn't it the case with Budget 2015 that in a year or two, a landlord won't be able to claim the mentioned interest on their mortgage anymore?

I agree, it certainly is hard work and yes I may make very little money if any at all, but I'm just thinking that it's my children's inheritance and even if I make very little, in a few years time, the property can be passed to one of my kids or even sold to help cover  the costs of paying for their university fees etc.  Truth be said, I also want to get a better life for myself and family and don't want to have to worry about paying a high-interest mortgage on a property which would be more expensive in a few years time to buy.  Unlike the current one, I need a property which isn't directly on the main road, doesn't have difficult access for my disability and has a garden.

Regarding interest-only mortgage - the plan is to make the rent pay off the interest which is currently very low and any money on top will be used to pay off the lump-sums every year.  Personally I don't think it should take us 32yrs to clear £50k...more like 10yrs as we are very careful with our budget.

You mention change of brand of coffee, but can you elaborate a bit on what you would recommend?  We did try to sell for the last 18months, dropping the price several times, but had very little interest.  My main goal is to get a property and hopefully move from here to a more decent place, so any suggestions would be gratefully appreciated.

@ Hippogriff:-

I don't have any problems with becoming a landlord, but I certainly don't want to go into a loss-making business.  As said to boboff we have tried to sell for the last 18 months without much interest and this is why I decided to go down this route.

Priority #1... new house that suits.

That priority is called #1 because it overrides all others. I would definitely advise not going the route you're contemplating. Having no problem being a Landlord is not the same as having a strong desire to be one. There is a load of legislation you need to be on top of and more coming... and contemplate what Jeremy Corbyn will do to this population if he's elected... it wasn't his first ever question today at his first ever PMQs for nothing.

What happens if you get that Tenant from hell who trashes your property and doesn't pay rent and refuses to leave? Do you have the financial and emotional means to handle that? What if the boiler goes pop? £2,000 probably.

If you've had little interest in your house... two options... reduce the price, do some work on it to make it more appealing.

I have reduced it now 5 times and even at this point I'm not getting anywhere... Assuming I got an offer, I'd be losing almost 50k at current asking price.

Thank you for your reply Riptide.  I'm sure I read somewhere that even those in the 20% tax would be pushed into the 40%.

It is possible to be pushed into the 40% tax bracket if you earn enough.

A quick lesson about tax rates;

Basic rate 20%   £0 to £31,785
People with the standard Personal Allowance start paying this rate on income over £10,600

Higher rate 40%   £31,786 to £150,000
People with the standard Personal Allowance start paying this rate on income over £42,385

So earn £42385 and you pay 20% income tax.  Earn £42386 and you pay 20% on £42385 and 40% on the £1 that is over.

Quote from: Riptide on September 16, 2015, 09:25:15 PM
Thank you for your reply Riptide.  I'm sure I read somewhere that even those in the 20% tax would be pushed into the 40%.

It is possible to be pushed into the 40% tax bracket if you earn enough.

A quick lesson about tax rates;

Basic rate 20%   £0 to £31,785
People with the standard Personal Allowance start paying this rate on income over £10,600

Higher rate 40%   £31,786 to £150,000
People with the standard Personal Allowance start paying this rate on income over £42,385

So earn £42385 and you pay 20% income tax.  Earn £42386 and you pay 20% on £42385 and 40% on the £1 that is over.

Okay, thank you. From that information I can safely say that we would not hit this threshold unless budget 2015 will include the 50k interest only mortgage?

So how would this affect us with regards to all the questions I asked in my previous post??

Quote from: novice-let2buy on September 16, 2015, 09:36:54 PM
Okay, thank you. From that information I can safely say that we would not hit this threshold unless budget 2015 will include the 50k interest only mortgage?

You really need to get your head around the finances.  'Include the 50K mortgage' makes no sense.  A mortgage is a liability, it's a loan.

Income tax is tax on income.  A 50k interest only mortgage is not income.

Income is money that you earn, say from a job or from rent on a house.

If you rent a house out for £500 a month and the interest only mortgage is £250 per month then your income (profit) is £250 per month or £3000 a year.  This £3000 is added to your income and taxed accordingly.

Quote from: Riptide on September 16, 2015, 10:41:53 PM

Quote from: novice-let2buy on September 16, 2015, 09:36:54 PM
Okay, thank you. From that information I can safely say that we would not hit this threshold unless budget 2015 will include the 50k interest only mortgage?

You really need to get your head around the finances.  'Include the 50K mortgage' makes no sense.  A mortgage is a liability, it's a loan.

Income tax is tax on income.  A 50k interest only mortgage is not income.

Income is money that you earn, say from a job or from rent on a house.

If you rent a house out for £500 a month and the interest only mortgage is £250 per month then your income (profit) is £250 per month or £3000 a year.  This £3000 is added to your income and taxed accordingly.

Right you are, sorry.   But I was referring to this:-
http://www.thisismoney.co.uk/money/buytolet/article-3153541/Profits-slashed-wealthy-buy-let-landlords-Budget-crackdown-mortgage-tax-relief.html

I am going to take the time to respond in the same vein as before... in the hope that my input is not taken as offensive and having-a-dig, but constructive and a reality-check... we'll see how I get on.

The world is too full of what we might term "accidental Landlords"... in reality, few are truly an accidental Landlord, as there's nearly always a choice to be made. I am getting the strong sense from you that being a Landlord is not a desire you've wanted to fulfil for years... you are considering it as a backup solution to the main problem of being unable to sell your house.

My assumption, to now, has been that if you could've sold your house, then you would've.

By "unable"... what we really mean is that you can't stomach what the market currently says your house is worth. It's a situation many have found themselves in - but is becoming an amateur Landlord really the answer to that?

I don't think it is.

I am a Landlord. I also have a job. However, I am a Landlord of 6 properties with ambitions to get to 10 (then I would stop). I enjoy being a Landlord, but I also realise how much time it takes up and how much hassle it creates. I would not recommend it for someone with a single property - I never do. You get all the hassle and not enough rewards.

So, let's go back to your inability to sell your house... I'd say that inability is simply because you would take a loss. Well, if so, that's just the way it is... you have to get your head around that - plenty of people buy things and then find they're worth less some time later (granted, that's not often the case with property, but it certainly can be)... instead of bemoaning the fact that there's a £50,000 loss why not put some Ks into it to try and bring it back up?

Send us the Zoopla or Rightmove link and I'm sure we'll critique it for you - objectively.

Consider changing your Estate Agent.

These might be things you have done, but it's not been said.

Finally, consider selling it for that loss just to crystallise your position and be able to move on. There is a lot of uncertainty around being a Landlord. Remember Labour wanted to bring in rent controls and 3 year tenancies if they won the election? Well, Jeremy Corbyn wants to go even further? You can bet many Landlords voted Conservative hoping Ed wouldn't be able to implement what he wanted to - but, then, George came along and hit us with the reduction in relief for mortgage interest - nice one. People say Jeremy is unelectable - but he is very popular and will appeal to those great swathes of people who want a different type of politics in the UK (myself included, maybe)... so be fearful of what could happen. Landlords are an easy target for Government to take more from.

I would urge extreme caution in your approach. You appear to not have an understanding of the financial impact this will have on you and the money you currently get in. You can surely see how it wouldn't be considered appropriate for a Landlord to receive money from the State - whatever form that 'benefit' might take? I have no clue about the benefits system (so I'm completely uneducated regarding Working Tax Credits or Child Tax Credits) but you might wonder why someone who has 2 properties (1 let out and making money) can receive any kind of benefits from the State - it would be an easy argument to make for someone who decided to try and make it.

On top of that you will have the hassle. I cannot emphasise enough that you could be creating your own money pit here. The first property I let out (I still let it out, to the same Tenants actually) was in really good nick, I lived there for 10 years and I'd redone the flooring, the bathroom, the kitchen etc. - a lot of work. In the last 2 years I've had to replace the boiler (£1,500), the integrated washing machine (£500), the fridge freezer (how that broke I'll never know, £300), the shower (£260) and the garden fence blew down in extreme wind (£900)... that property is not a cash cow at all. It's not only the costs, but the time, stress and aggravation. I get the same levels of stress and aggravation with 6 properties as I did with 1 property (or it certainly feels like that). The best of being a Landlord is when you can scale, just a little bit.

Don't think you've gone too far down a path so you can't pull out. If you've agreed a BTL mortgage, you can pull out. If you've put the property on the rental market, you can pull out. If you've got Tenants sitting inside your property, growing cannabis and not paying you rent... no, you can't pull out.

For your other questions... having estimated figures can be useful if you were to phone up HMRC, surely? Or CAB? Or Shelter even? Someone who can provide an insight into your particular situation (because that's not me, I'm just taking the time to tell you how nervous I am about what you are describing).

I'll try not to say any more on this now. 

Thank you Hippogriff for your detailed reply.  No, I'm not offended at all as I prefer someone whom is honest rather than someone who says something just to please you.

In answer to you....

To be honest, I've actually always wanted to be a landlord and by me asking all these questions, I'm showing that I'm doing my research as I don't want to end up being that "accidental landlord".  It's true that I'm not sure about the financial impact, but that's why I've come onto these forums to ask these questions and hopefully get an answer to make a decision.  Your right in saying that it is a risk, but so is any other business investment that one takes.  £50K is not a small amount of money to lose and since we've already spent a lot of time and effort doing up the house, I don't want to spend more money doing it up any further.

And please don't worry about saying anything...it's a free forum and your opinions and advice are most welcome.

Free advice.

You shouldn't let your home out.

Sell it and rent if you have to.

Your basic lack of understanding of tax, and your own finances, along with a misguided idea that you are "keeping it for the children" is wrong ( why would they want what is an unsaleable house, be nice to them!)

You dont seem able to sort out issues with a simple google search either.

I am the harbinger of Doom I get that, but in no uncertain terms your plan is wrong, you wont be able to handle this, you are dreaming, stop it wake up, do something else.

(Ps I am sure you are very nice man, and you deserve a better home and garden etc, thats not the issue, it's just this choice is wrong on all fronts)

Think about it, you are going to do this, then any benefit you are going to put into repaying a liability on a property you cant sell, and you will even go so far as to moderate your budget to achieve this. Surely the better option is to save a deposit, and rent! ( you might even get benefits for this)

I am intensely curious about why this house appears unsellable.

I've seen some right old dives in my time... everything always ends up selling. I'm not even inferring you're living in a right old dive, or underneath a flight path, or behind the biggest nightclub in Western Europe or lacks, shall we suggest, central heating (and I'm certainly not implying it)... so I'm curious... and there's gotta be something that can be done to sell... we've all seen Selling Houses on t'telly, right?

Some fresh paint and some new laminate flooring (hint - you don't paint the new laminate flooring) and you're good to go, right? 

If you have a desire to be a Landlord then go for it - I had not read that into what you'd written before, just that you were in a bind and being forced down that path - but to get proper answers to the questions you're asking you may need to talk to a professional of some kind... and that might mean £s. I am not expert enough in things like tax credits etc. to give advice.

I still think we have too many Landlords who have 1 property and aren't "doing this right"... that's also not meant to be offensive, because 70% of all Landlords actually have 1 property (we can understand why) but it's some of these Landlords who haven't got the time or inclination to "do things right".

Of course, that does not mean a Rachman-type cannot have loads of properties and be terrible too.

I am very nervous, for you, about your plan... but I think we've railed against you enough now. Onwards and upwards...

Okay, yes, what he said.....

Wow, that doesn't happen often!

Hmm, my previous post was meant to be more tough love than arrogant, condescending bastard, I need to work on that... sorry.

@ Hippogriff - The house is fine itself as I've spent money doing it up as it has been used as a family home...just that it's on a main busy road, has steep steps and the prices offered by the buyers are way too low for what we are willing to let it go.  And just to be clear, we are not being greedy sellers...in fact we have already dropped the price quite a bit.

@ Boboff - I'm not upset in what your saying, so please be my guest.

Please be careful of advice received from websites (including my own) and always do your own research.
Obviously I cannot understand your full situation from a small blog....

You seem to fending off the replies from Bob, Ript and Hippo....why? Have you already made your mind up??
They usually know what they are talking about (other than saying interest only mortgages are stupid...they aren't stupid for those with financial discipline and financial understanding/insight which quite frankly you don't have so perhaps for you they are right).

You are obviously torn up about discounting your house by so much to sell it.  Are you making a loss at that price? Who valued the property at the first price? Usually the market is better at setting the price than an agent driven by percentage fee.

You also say that you are ok to not make money at all...and you don't want to go into a loss making business...
Are you ready for a loss?
Maybe for multiple years?

Look forget trying to be smart about tax for a moment and just do a basic basic income outgoing calc.
...£5000 income
Deduct agent fee say 10% (upper end incl fees for contract etc) 500
Insurance - 250
Gas cert -50
Mortgage interest - 1000 (2% assumed)
Boiler cover (?) 200

You almost certainly start at maximum at £3000 potential profit.
Sounds great?
Now look at what could happen ....
Interest goes up to 2.5% take off another 500
Tenant doesn't pay and you to evict - take off 3 months rent 1250
Court costs (assuming you do it all yourself - 300
You have redecorate £1500 (and that is a super low estimate)
Replace one white good (incl installation) take off  600

Water leak damage 500
Tenant breaks something 500

So now how are we doing...? Oh yes total profit ..... Naff all...

What if the roof needs replacing in year 10...that means zero profit that year off the bat.

...and then on top of that start thinking about tax....

But most importantly.....I cannot stress this enough....is the hassle and stress you will have to go through something you can deal with?
I could write a book on the stupidity of tenants and the hassle they can cause a Landlord ...

Why are you talking about the changes in the tax scheme...? Are you sure the  base plan is robust?
You could have the rental property eat into your well managed budget for a year or two or more....

Look I'm not saying don't it (the others have said that and I infer that you are set on this approach)
I'm just saying open your eyes... Your family may have to go without a holiday one year...

When I started out 18 years ago I did it with my brother and we had the backing of our parents if we needed it...if you have that backing it might make things easier / safer.....
We broke even on the first house for a couple of years before moving into profit but we both had jobs to falls back on and no kids to support


Anyway having said all that you asked about tax not whether you should embark on this venture
It's not going to be possible for anyone to do the maths for you as you haven't provided enough info on how and who gets the tax credits etc..
But given you are a 20% marginal tax payer ... the new legislation isn't likely to affect you (especially if you and your wife own the house)

You might be ok and it all works out well but consider the advice of the others who have posted.

Best of luck

Quote from: theangrylandlord on September 19, 2015, 12:19:29 PM
Please be careful of advice received from websites (including my own) and always do your own research.
Obviously I cannot understand your full situation from a small blog....

You seem to fending off the replies from Bob, Ript and Hippo....why? Have you already made your mind up??
They usually know what they are talking about (other than saying interest only mortgages are stupid...they aren't stupid for those with financial discipline and financial understanding/insight which quite frankly you don't have so perhaps for you they are right).

You are obviously torn up about discounting your house by so much to sell it.  Are you making a loss at that price? Who valued the property at the first price? Usually the market is better at setting the price than an agent driven by percentage fee.

You also say that you are ok to not make money at all...and you don't want to go into a loss making business...
Are you ready for a loss?
Maybe for multiple years?

Look forget trying to be smart about tax for a moment and just do a basic basic income outgoing calc.
...£5000 income
Deduct agent fee say 10% (upper end incl fees for contract etc) 500
Insurance - 250
Gas cert -50
Mortgage interest - 1000 (2% assumed)
Boiler cover (?) 200

You almost certainly start at maximum at £3000 potential profit.
Sounds great?
Now look at what could happen ....
Interest goes up to 2.5% take off another 500
Tenant doesn't pay and you to evict - take off 3 months rent 1250
Court costs (assuming you do it all yourself - 300
You have redecorate £1500 (and that is a super low estimate)
Replace one white good (incl installation) take off  600

Water leak damage 500
Tenant breaks something 500

So now how are we doing...? Oh yes total profit ..... Naff all...

What if the roof needs replacing in year 10...that means zero profit that year off the bat.

...and then on top of that start thinking about tax....

But most importantly.....I cannot stress this enough....is the hassle and stress you will have to go through something you can deal with?
I could write a book on the stupidity of tenants and the hassle they can cause a Landlord ...

Why are you talking about the changes in the tax scheme...? Are you sure the  base plan is robust?
You could have the rental property eat into your well managed budget for a year or two or more....

Look I'm not saying don't it (the others have said that and I infer that you are set on this approach)
I'm just saying open your eyes... Your family may have to go without a holiday one year...

When I started out 18 years ago I did it with my brother and we had the backing of our parents if we needed it...if you have that backing it might make things easier / safer.....
We broke even on the first house for a couple of years before moving into profit but we both had jobs to falls back on and no kids to support


Anyway having said all that you asked about tax not whether you should embark on this venture
It's not going to be possible for anyone to do the maths for you as you haven't provided enough info on how and who gets the tax credits etc..
But given you are a 20% marginal tax payer ... the new legislation isn't likely to affect you (especially if you and your wife own the house)

You might be ok and it all works out well but consider the advice of the others who have posted.

Best of luck

Thanks for your reply theangrylandlord.  I'm not fending off any replies...simply giving my reasons why I may possibly be able to make a go of it.  If anyone has felt that I've been defensive, then I do sincerely apologise.

As said, I am making a huge loss of approx £50k as I've spent a lot of money on the home...some of the work has been for: new boiler (2yrs old), new roof (4yrs old), new bathroom (2yrs old).  My loss is not only due to the spenditure, but it's because I bought the property when prices were almost peak and now I'm largely in negative territory...this is the reason why I thought letting out would be better as it would mean that in time the property value would go up too.

I can totally understand what you guys are advising and I am grateful for your honesty.