Updating post from Reddit.
Hi all. I own a flat 2 bed flat outright that I am currently living in. In the future I will be renting it out when I buy another place.
My flat would go for £1500 a month on the current market . Sadly over the last few years my service charge has really gone through the roof. It is £4000 and I don’t even live in London.
Anyways out of interest how much money would I gain from this? How would I work it out? Would I just be adding this to my salary as an extra earning after all the expenses such as letting charges? My salary is £45000. My wife currently has an earning of £30k. Could I get the payments sent to her instead to reduce the potential taxes? Also to confirm would the taxes need to be paid on the total profits after all the necessary expenses?
Thanks for the help as always!
You will almost definitely not make money. The excess stamp duty alone on your next place will chew though a decade worth of profits (if there are to be any profits at all). Are you planning to buy your next place with a mortgage - in which case you would best put your asset value towards that. Even then your money would be better out of the rental marker right now -- which is why landlords already in that market are exiting it in favour of corporate landlords.
No if you are the sole owner you cannot allocate it to your spouse -- for spouses the allocation has to be in proportion to actual beneficial ownership. Yes you pay taxes on net profits.
How much is the flat worth? I'd guess around £400,000 to get that sort of rental amount. £400,000 earns £16,000 in interest in a savings account right now - without expenses before tax but without risks, voids, damages, and with no work.
Amen. Could not have put it better!
Hey! Thansk for the detailed answer. I am currently living tin this flat so can’t sell it until I decide to move to my new property. My dad will be gifting me some money so that may help. It is a shame that the rental market will be that bad.
My flat is worth £240k. I have seen many flats in my building go for £1500. I guess I will sell my flat if the situation doesn’t change. Ref the damages, you are sadly right. Thanks for the reply as it does put things into a perspective.
I am in a very similar situation to you, I'm currently losing about £750 a month to rent it out. I'm an accidental landlord and can't wait to sell and get rid of the damn thing.
Damn man. Sorry to hear that. I guess it is the mortgage payments that are causing you to lose £750 a month?
mortgage, tax, service charge, repairs, agent fees ...
Hope that you are able to sell it soon. :(
You could rent it out and put 100% of the profit into a SIPP and not pay any tax on it until you retire but this is the long game. Just see it as a retirement plan and not a way to increase your income short term. The flat will most probably appreciate over the years too. You’ll get hammered by taxes when you do your tax return otherwise.
Oh brilliant idea. Thanks a lot for this!!! Much appreciated. Didn’t think of it at all.
You can still pay your insurance plus any repairs from the income as this is tax deductible. Put the rest in the SIPP. Also, I’d just check with a financial advisor. I’m not an expert but this is what I’d do.
Thanks will do. :)
It depends how much of a mortgage you have on it when that time comes but it starts to look very close to break even on your salary with that service charge plus 2/3k other expenses per year if your mortgage is going to cost you £500+ in interest per month.
Taxes are calculated based on total profit after expenses, but the cost of finance (your mortgage repayment nor interest) aren’t considered an expense.
Thanks for the reply. Just to clarify I have no mortgage on the flat.
Your taxes are very simple then.
Rental income 18k Expenses - service charge 4k other expenses 3k Profit -11k
You’ll pay 20% tax on 5270 - 1054 You’ll pay 40% tax on 5730 - 2292 Total tax bill - 3346 Annual Take home after tax - £7654.
I can’t answer the question about your wife. You’d need specific advice on that and I’d assume it depends on whose name the property is in, and who is registered as a landlord. Obviously she would pay less tax if the income were hers because the rental income takes you into the higher rate.
Thanks so much for this. Had a feeling it would be something like this but thanks for the breakdown and clarification. Much appreciated.
I only read the headline and can already tell you the answer is "no".
I am aware that it is shit now but will it not improve in the future?
How much has it appreciated since you bought it?
I addition to the extra 3% stamp duty on the new home you purchase, your primary residence relief will diminish over time meaning your (assumed) capital gain which is currently tax free will be taxed when you sell it.
I just bought it a year back and I don think it will appreciate but good to know for the future.
Impossible to tell. You don’t include much information. How much is it worth?
Apologies. Didn’t think it was important. I bought it a year back for £240000
It’s a 7.5% gross yield. So let’s start with that. I’d challenge you on the valuation later.
Net yield is 5% after service charge and 2k for other costs.
Which is about what you would get risk free, or tax free in an ISA.
After tax so you down to 4%.
You say you’re going to purchase another property so this rental adds how much extra second rate stamp duty? 25k? So that’s 2 years plus of rental profit needed just to pay that tax bill. Instead you can avoid that tax bill and take your “240k” and get 4.5% tax free in your pocket. So either you can pay 25k or get £21.6k, that’s a 45.6k difference in your personal wealth.
If you brought a property for 240k then it’s liability increased via the service charge then it’s worth less today probably. How much less?
Outside London with that service charge, why?
It’s a flat, so got zero development potential.
It’s has a high service charge so it’s a liability not an investment. It’s a home with additional council tax it’s not an investment.
Probably worth 180k, so the gross yield is 10%, sound great! But it’s a value trap. It has no grow potential, all returns are going to be via rental income. You’re high 10% but that has a result of losing 60k.
It’s a terrible investment.
You would pay tax after expenses.
And a lot of stamp duty on your next purchase.
Hey. Thanks for this input. Yes, I do agree that I have made a bad investment here. Not much I can do about it now. Will take your input into account when into buy my next investment. Thanks once again.
Don’t do it, in short, you need to be one of two things for property to be worth it now:
Already wealthy or have very high income you want to diversify. Property is good for diversification as Trump is showing us right now.
If you are really bullish on property prices. It’s hard to find someone that believes property goes up lots more than the general market now a days.
If you are buying another place, the 3% additional is going to be killer.
The 240k additional mortgage at say just over 4% will be costing you £10k a year. That’s the opportunity cost of getting a larger mortgage because of the decision. That’s the low end of the opportunity cost scale, others will say far higher in the market.
So to break even on the decision you need your profit plus capital appreciation to be above £10k a year and that isn’t taking into account the 3%.
I'm a landlord,
It's getting worse for us,
I have a flat with a 4000 service charge, painful.. You can fill in a form and say your wife will get the rent.
Bear in mind you'll pay cgt on any gain from the moment you rent it out, minus a bit of releif from when it was your main residence , also obv income tax, also section 24 of housing act, means you can't claim all mortgage costs
Hey. Understood. Thanks for the info on the letter. I don’t have any mortgage on the flat. Don’t you think that it will get better at all? I think that with the supply dropping, the demand for rental properties will only go up. Or is this just nonsense? Is the CGT on the potential rise in the property value? If so I thought that this would only happen when I do sell the property. And not when I rent it out.
Yes CGT is when you sell, Well no mortgage certainly helps as the gov punishes borrowing to fund BTL unless in a company but then there's high costs as well. Yes less supply is one thing but then there's more defaults, and it's extremely difficult to get a property back now,. Can take years, be very careful who you give the keys to
Okay thanks for the answers.
From experience how can you tell if a tenant will be good and will pay on time? I always did this when I was a tenant but clearly not everyone will. How are you careful when giving the keys to anyone?
You can use services like open rent, they do all checks, They will need to check immigration status and passport, job wages etc, the better the job the more likely they won't default
Ahh okay understandable on the job aspect. Thanks for that input. Much appreciated.
Airbnb?
as much as i’d like to help, this is a question for an accountant/tax adviser - not reddit.
Even though someone has done the sum and it’s £7500 a year 🤷 you don’t need professionals to do maths for you.