Q I get rental income of £1,000 a month on a property which is managed by a letting agent who charges me 12% commission (including VAT). After paying tax at 40% I am left with monthly rental income of £528. My two-year fixed-rate interest-only buy-to-let mortgage costs me £300 a month.
I am looking to buy a family home with my partner soon which would be a second property for me. As a higher rate taxpayer, is it financially sensible to keep hold of my first property or should I sell it asap?
I’m a doctor with the NHS and have been advised that buy-to-let properties aren’t tax efficient. Please help me with my financial wellbeing.
A What you have been told is correct: buy-to-let (BTL) properties are a lot less tax efficient than they used to be especially for higher rate taxpayers. Up until 6 April 2017, all landlords could reduce the taxable amount of rental income by deducting the cost of interest on mortgages and other loans. But since that date only landlords of furnished holiday lettings – for which HM Revenue & Customs has a technical definition – can carry on deducting the full cost of mortgage interest from their holiday letting income. BTL landlords like you get a tax credit of 20% of the value of interest payments made to set against their tax bills.
Because you can still deduct the commission you pay your managing agent to reduce the amount of rental income on which you pay tax, you’ll pay tax on £10,560 rather than the full £12,000 that you charge each year. So after deducting tax at 40% you are left with the £528 a month that you mentioned.
However you should be left with more than that because you don’t seem to have applied the tax credit of £720 (yearly mortgage interest of £3,600 times 20%) that you are entitled to. And it makes me wonder whether you have been taking mortgage interest into account in previous tax years so it might be worth your while having a chat with an accountant because you could be due a rebate.
As to whether you should sell your BTL property before buying a family home with your partner, if you don’t you’ll have to pay the higher rate of stamp duty land tax on the purchase of your joint property. But if you do sell the BTL property, there could well be a capital gains tax bill.