Updating post from Reddit.
I’ve seen a lot of people on here saying Buy-to-Let is a bad idea — especially now with rates, tax, and regulations. But I’m seriously considering it, and want to know if I’m missing something.
Here is my situation: Age: 30 Salary: £56,000 Current mortgage: £55,000 Current house value: ~£165,000 So I’ve got around £110k equity
My plan is:
I’m not chasing a monthly profit. I fully understand why many say it’s a bad idea from a yield point of view — but that’s not my main goal.
What I'm Trying to Achieve:
I may even overpay monthly to help get it paid faster.
The goal is that in 20–25 years, the house is mortgage-free and fully owned then at retirement, I would sell the rental, when: I’m no longer a higher-rate taxpayer I can use Private Residence Relief (I have lived in this house for 8 years) I’d qualify for 18% Capital Gains Tax, not 28% Meaning I keep significantly more of the capital gain That lump sum would then sit alongside my pension and personal savings as a bigger retirement boost.
The Numbers: BTL mortgage: £120,000 Rent: £850–£900/month Mortgage repayment: ~£775/month Cash flow: small surplus or breakeven — which Is sound if the mortgage is being paid. Estimated value in 20–25 years: £250k–£275k Capital Gain: ~£180k CGT with PRR + basic-rate status: ~£20k bill - keep ~£160k cash
So What Am I Missing here? I’m not planning to scale into a property empire I understand the risks, void periods, maintenance, regs, etc. I get the boiler may break or there might be a couple missed payments (hopefully not, but I understand this is the risk)
But a lot of posts make it sound like BTL is not worth it full stop — am I underestimating something? I would like some help to understand better as in my head currently it is a no brainer?
You’re misunderstanding how the tax works. HMRC doesn’t look at whether you’re making a real-world profit after mortgage repayments. You’re taxed on the full rental income, and you only get a 20 percent credit on the mortgage interest part. Capital repayments aren’t deductible.
Just to show how it works using your numbers: Rent: £900/month = £10,800/year Mortgage interest (say £6,000 of the repayment) Taxable income = £10,800 Tax due at 40% = £4,320 Tax credit (20% of £6,000) = £1,200 Final tax bill = £3,120
So even if you’re breaking even in cash terms, you’d still owe over £3k in tax. That’s the key issue people are pointing out. It’s worth getting proper tax advice before going ahead.
^^^ This is the right answer ^^^
Not to mention CGT when you come to sell. On top of that it’s not just mortgage but regulatory requirements, upkeep, unoccupied or tenants not paying rent, EA fees, insurance, Gas safe, electrical, bills when property is unoccupied etc.
The famous saying is money is made between the lines. Everyone I know is either losing money in the industry or making money between the lines.
Some people are great (lucky perhaps) landlords, some are electricians buying up houses needing rewiring, some are buying up houses and building extensions or converting to HMO, some just need to diversify etc.
If you’re hoping buying a rental is just like printing money then you’re wrong. Go out your money in the S&P if you feel like it’s not working hard enough for you.
Had a friend a few years back buy a rental. He begged burrowed and stole (including from the in laws) and threw £140k at one property. £40k was on improvement works which took 2 years (ie no rent but still had mortgages, CT etc to pay) and when he got the property revalued it was valued at £5k more than what he spent for it. Half of the rent he gets goes to HMRC and then 12% to the letting agents. If he’d stuck that money in the S&P he’d been laughing but instead he’s losing money hand over fist and can’t sell until the 5 years fixed is up or risk the ERC.
This answer can’t get enough upvotes
Hang on, apart from the fact you aren't accounting for any maintenance costs here - what are your calculations for tax on your rental income?
Also are you considering this will make you liable for additional stamp duty at 5% on your new place?
I wouldn’t be paying tax because I wouldn’t actually be making a real profit, yeah maybe £1,500/year in maintenance, so worst case I’m out of pocket a few hundred quid. But the tenant is covering the mortgage and building equity for me, that’s the long game.
What do you mean, you wouldn't be paying tax because you wouldn't be making a profit....?!! I think I have found the flaw in your plan.
Suggest you read up on the law around rental income tax. Especially the removal of mortgage interest tax relief.
If you rented at 900 a month, 10800 a year, you lose 40% so your left with 6480 left a year, then minus your other costs
I rent for £900/month (£10,800/year) and my mortgage is £775/month (£9,300/year). Add £1,200 in costs (maintenance, insurance, etc.) and my total expenses are £10,500. So profit = £300/year. You’re only taxed on that, not the full rent. Is this not correct? And as a higher rate taxpayer I still get a 20% tax credit on the mortgage interest, so in this case, the actual tax due would be tiny or nothing. -
No it's not even close to being correct. I have no idea where you got the basis for this calculation, even chatgpt would do a better job.
(Before someone says I should do a step by step calculation, this is so basically wrong that the OP needs to type into Google 'BTL tax calculator'...)
https://www.gov.uk/renting-out-a-property/paying-tax - ‘you only pay tax on profit from your rental property’, ‘you only pay tax if you profit more than £1000’ - I wouldn’t be profiting even £1000
In bold on that page!
If you’re a company paying Corporation Tax, you can claim interest on property loans as an allowable expense. You cannot do this if you’re an individual landlord who pays Income Tax.
Right ok, This is straight from HMRC:
“You cannot deduct finance costs from your rental income... Instead, you’ll get a tax credit of 20% of your finance costs.”
So Say I rent the property for £10,800 a year and have about £1,200 in costs like maintenance and insurance. That leaves £9,600 profit. Because I’m a higher rate taxpayer, I’d normally pay 40% tax on that, which is £3,840. But I get a 20% tax credit on the mortgage interest so if the interest part of the mortgage is £6,500, I get a £1,300 credit. That brings the actual tax bill down to around £2,540. So I’m not paying 40% of the rent I’m paying tax on profit, with a credit to reduce the bill.
Yes, that's correct.
I'll point out that this is very different to what you said at the start of this thread. You've gone from a tax bill of ~£100 (1% of gross rent) to ~2,540 (24% of gross rent).
> I rent for £900/month (£10,800/year) and my mortgage is £775/month (£9,300/year). Add £1,200 in costs (maintenance, insurance, etc.) and my total expenses are £10,500. So profit = £300/year. You’re only taxed on that, not the full rent. Is this not correct? And as a higher rate taxpayer I still get a 20% tax credit on the mortgage interest, so in this case, the actual tax due would be tiny or nothing. -
I’ve learnt a lot in the past hour 😂
And he has gone from a potential profit of a few grand to roughly 0...
6500 interest, 2500 tax, 1500 maintenance and any documentation needed like EPC, EICR, referencing etc will be roughly the £10800.
But you can't take your mortgage off as an expense, I think that's the confusion, you can't do that anymore, it's a cost but not an expense, so your only expenses are 1200 for maintenance and insurance etc, not mortgage or interest
I think if I've got this right, ignore the tax credit for now as I think it's a minor figure, basically 10.8 income, apparently you can claim expenses for the other bits so maybe 10.8 - 1200 = 9.6k income your taxed on so lose 40% = 5760 left. But your mortgage is 9.3k so your actually at negative - 3540
Oh gosh no. Not at all. Please do not do anything until you talk to an actual accountant or solicitor.
Tax on BTL for a non LTD no longer gives mortgage interest relief
If the property is not in a ltd, you’ll be making a fairly large loss after you factor in tax. The fact that don’t make a profit is irrelevant in terms of tax payable.
I have factored in the stamp duty, but I have read this is 3%, not 5%?
I'm pretty sure you'd pay 40% tax on all the gross income, you don't just pay tax on profit, it's the whole income, it counts as income and your higher bracket
That can’t be right, you’re only taxed on your rental profit, not the gross rent. I can’t deduct capital repayments, but I get a 20% tax credit on the mortgage interest, and I can deduct maintenance, insurance, etc.
I’m going to make a small profit at best £120, there probably wouldn’t be any tax owed anyway after deductions.
You need to look up "allowable expenses" on HMRC, mortgage costs are not one of them.
Come on bro all the facts are laid out here if you can’t understand what people are trying to tell you this probably isn’t the business for you. I think you need to give this one a miss bro. If you aren’t even up to date on additional rate stamp duty does kind of suggest you aren’t really that committed to the idea anyway. Stick to equity markets imho btl is a business these days not a hobby like it was 2000-2020
Mind blowing mate, never done it. Just thought it may have been an idea rather than going the traditional normal route of getting a bigger mortgage and paying it till I’m dead haha
If you can time travel it might be 3%, went up to 5% at the last budget.
SDLT BTL surcharge is 5% in addition to / extra / on top of the rate that applies to your property band/value.
E.g. £250k 5% + 5% = 10%
I think I do something similar to what you plan, but on an accidental basis in that I bought a flat 20 years ago, lived in it for 5 years, and when I came to move on I found it unsellable (without still owing money)
I just about fail to break even month to month, and I can only keep the losses to a minimum because it was a cheap property when I bought it and I'm on a low interest rate of 2%
I charge a under market value for rent - because I have a lovely tenant and don't want to lose her - and the rent covers 150% of the repayment mortgage costs. I will never raise the rent mid tenancy but when she leaves I may raise it to the point that the whole endeavour is neutral in cost month to month.
The 50% extra just about pays for leasehold maintenance fees, letting agent, repairs, insurance, and then tax takes me into making a small loss at the end of each tax year - generally about £200 to £500 so not huge - but its something.
I look at it as - I'm getting a fully paid for property for a few £ each month. But honestly, the hassle isn't worth it. its a constant worry, I feel such a responsibility to my tenant, have all the risk of property ownership for no immediate benefit. Even though I pay for full property management - it does involve work that I cant really be bothered to do.
On the good side - I've only got about 5 years left until the mortgage is fully paid off. Every year that passes is a year closer to me being able to actually have some real income from the flat, It would become a bit of an asset for retirement and if it all becomes too much of a hassle I can just sell it for whatever I can get.
Firstly the fact you’re keeping the property in your personal name means as a HRT you only get a 20% credit on the mortgage interest, while paying 40% tax on the rent so you’re automatically losing 20% right there
You’ll likely won’t find a repayment BTL but it’s simple enough to have an interest only BTL mortgage and then overpay.
Thanks! yeah, I’m aware of the 20% mortgage interest tax credit rule for higher-rate taxpayers. But I won’t actually be making any rental profit, I’m using a repayment mortgage, so my rental income is pretty much all going toward the loan and maintenance. So in real terms, there’s no tax owed anyway.
And yep, repayment BTL mortgages do exist but they’re just less common. I’ve spoken to a broker and it’s possible with the right lender. Worst case, I’ll do interest-only and overpay, as you said.
> I’m using a repayment mortgage, so my rental income is pretty much all going toward the loan and maintenance. So in real terms, there’s no tax owed anyway.
That's not how it works.
You’re totally confusing tax liability here. Forget the thought that you’re effectively making no profit so no tax to pay as it’s wrong. Simply put you remove allowable expenses from your rental income, receive a credit of 20% of the mortgage interest and then pay 40% on the rest.
Have a play with the calculator here: https://taxscouts.com/calculator/rental-income-tax/
So if you receive £12k rental income per year. Have allowable expenses of £500. Mortgage interest of £6k you will pay 40% of 12,000 - 500 - (6000 x 20%) = £10,300
= £4120 tax!
You pay tax on the entire rental revenue- they don’t just tax you on the profit. So if you take £800 rent £300 + of that goes in tax.
So you are missing landlords insurance, tax on the entire rent (not just the profit) and estate agent fees.
This ideal of 'profit' is irrelevant for tax purposes.
What matters is the income and the allowed deductions. If you were a ltd Co, that would likely be more like what you describe (but not the repayment element - that is never going to be a allowed deduction as it is profit) but as a individual you have your allowed deductions incorrect and it is making your numbers totally off.
Have you spoken to a broker yet? When I was applying for a mortgage a few years ago and had a tennant who had been in for years paying way under market rate, they were very uneasy. Numbers were way less edgy than yours as well.
Thanks and yeah, Ive had a conversation with a broker this week. I understand they’ll stress test the rental income against the mortgage using an assumed higher rate, but I think I should still pass that based on £900/month rent. But good point, if it ends up renting lower, it could throw the numbers off.
No chance securing a mortgage with monthly payments of £775 against rental income of £900 unless the lender allows you to top up with personal income.
You’re missing the 40% tax on the rental income.
Profit on rental income for a property in personal name is calculated as:
Rent Minus Allowable expenses (maintenance, management, insurance etc BUT not mortgage interest) Equals Profit for tax purposes (Gross Profit)
You then get 20% of your mortgage interest as a credit.
So you can make a loss in real terms but still pay tax on the gross profit.
BTL in personal name isn't a great idea. You'd also be a high rate tax payer so 28% CGT.
Finally, the PRR is calculated as time lived in property divided by time owned. So if you kept it for 20 more years, you'd only save 8/28 (29%) of the CGT, not all of it.
Thanks for your comments everyone, appreciate it. Absolutely mind blowing
Off topic, but do any of you clever people have any other wonderful ideas of what I can do instead? Because this math is no longer mathin and my dream has been destroyed. Do I just sell and buy a house and live a normal life? Do I pull some equity out and invest it?
Look into the potential of buying as a ltd company. Still has its flaws but is much more viable.
Take half your equity and use it as a deposit on your new house. Take the other half and invest it in a stocks and shares ISA (well, 20k of it this year and then 20k in subsequent years).
If you want to emulate the experience of being a landlord, offer to fix any problems with your neighbours houses for free and every so often, burn a grand (to simulate not receiving rent, void periods, the roof breaking etc.)
As an entrepreneur you have to take risks, but the one thing you should never do is risk the equity in your home (in my opinion); you are asking for serious trouble. The safe way to leverage your equity is to downsize so that you have no mortgage. That way you will have a much bigger income, and you will be able to save for a deposit on a BTL (or whatever business venture you prefer).
Do yourself a favour. S&S ISA and drip feed into a low cost index fund or salary sacrifice some pension if your employer also contributes.
In 25 years you can expect to have to refurbish bathrooms and kitchens atleast once if not twice.
Bathrooms in rentals typically last 5 to 10 years. Kitchens maybe 10 to 15 years. Boilers maybe 10 years.
Then their is the EPC every 10 years and changing regulations coming in. Under new renters reform bill tenants only need to give 2 months notice so void periods may become more prevalent as tenants shop around for more competitive accomodation. Have you a contingency for a worse case scenario where a tenant stops paying rent and refuses to move until evicted by balifs. Can take upto two years without rent and thousands in eviction costs with no guarantee that a ccj will ever be collected on.
So subtract future renovation costs from your final gain to harbour a more realistic figure of profit.
Two bathroom renovations. Likely between 5 to 11k each let's choose lowest figure so that's 10k. A new kitchen in 25 years that's 8k minimum so now at 18k. Next boilers possibly 2 in that time frame so another 7k. So minimum likely future renovations is 25k.
Then decorating house unless you prepared to DIY it yourself then budget 1 to 1.5k per room usually needs doing between every tenancy.
Upgrades unless a new build to get EPC to C or better could be expensive.
Gardening on top as tenants usually don't do gardening even if in contract to do so.
Cost of replacement furnishing and white goods.
Insurance typically 500 to 1000 a year.
Management fees between 10 to 15%.
It all adds up so if you calculate these costs into your model it servearly dents your profits.
When tenants move on if using an agency they charge typically 1 months rent for new tenant finders and setup fees. Usually a void month whilst you do maintenance and referencing of new prospective tenants happens. Costs typically 3k for a change over in lost rent, renovations and costs of new contracts etc.
What you are missing is you won’t be able to take a random property (aka the one you already own, not bought to be a rental so no chance the numbers are good) and either:
Have a mortgage free property in 20-25 years OR have a tenant cover the mortgage
BTL are generally interest only mortgages, which never go down. Repayment BTL mortgages are unlikely to be converted by the rent.
Plus everything else the others have covered with tax and costs.
I am happy to spare some time to have a phone call to help you understand buy to let process better.
I’d get the property in limited company. You can deduct interest from your tax
I'd look into creating a LTD company for this personally, have you do this?
I've started to look into a BTL property and as I'm a higher rate tax payer it makes more sense to creat a LTD company to it for tax reasons.
Also, it looks like a better option to get an interest only mortgage, at least at first.
I'd look to put 30% deposit down, interest only mortgage as the interest is fully tax deducatble as far as I can make out. Then your tax liability will be 19% corporation tax and you can of course claim expenses to reduce that for things that have been done to the property.
Also you can pay yourself back using a "directors loan" mechanism that is tax free for upto £100k. Then it you can either dividend it out at about 30% tax (I think) or just keep it in the coimpany and use it to pay the equity off on the property.
This is my understanding, but I am only just starting, so don't rely on this. Maybe someone with experiance can confirm?