Does tax eat too far into profit?
If we are going build a portfolio of to buy to let properties, there has to be a profit left over from the rent we get from tenants each month to pay for:
- the mortgage on the property
- buildings insurance
- setting some aside to pay for future repairs and/or upgrades.
Anything left over from that is net profit. In the first few years this profit will be reinvested by being saved up until it can form the deposit on another property. But profits are income so that means tax.
Pre 2017
Before 2017, landlords were able to deduct the interest from the mortgage on the rental property as well as any other expenses paid for during the year and call the rest net proft. The tax on net profit is 20% for basic rate taxpayers and 40% for higher rate.
In 2016, the government announced a change to the way tax for landlords is calculated from April 2020. You will no longer be able to deduct mortgage expenses from rental income to reduce the profit and thereby reduce your tax bill.
2017 to 2020
This approach is being phased in so in 2017-18 you could claim 75% of your mortgage tax relief. Remember the tax year runs from 6 April to 5 April. In 2018-19 you can claim 50% of your mortgage tax relief and in 2019-20 25%.
2020 onwards
For tax year 2020-21 and years after that, you won’t be able to deduct any of your mortgage expenses from rental income to reduce your tax bill. Instead you’ll receive a tax-credit based on 20% of your mortgage interest payments.
What does this mean for us?
But we have day jobs and buy to let property is our side hustle. We are higher rate tax payers and a 20% tax credit isn’t going to help us keep the cost of that tax bill down.
For example, lets say we buy a house where the mortgage costs £600 a month. Suppose the rental market is good and we can get £950 rent for that house each month.
| Rent | £11,400 | |
| – | Mortgage | £7,200 |
| – | Buildings Insurance | £300 |
| – | Money saved for repairs | £1,080 |
| – | Tax Bill | £3,120 |
| + | Tax credit (20% of mortgage) | £1,440 |
That means that this house would give us a profit of £3,740 a year or £311 a month. Of course the longer we own the property the more equity we’ll have too. So is this side hustle a short, medium or long term thing?