Just submitted my payment in to HMRC. I am in a high tax bracket which is making it very difficult to justify owning a buy to let. I just calculated my profit for my one rental property after paying HMRC is a measly £249. What a joke. And the joke is on me because my property is an old Victorian and is constantly having problems that take up vast amounts of my time. I am holding on to it so my daughter can have it in the future.
Am I missing something or is everyone getting hit hard?
You are right that the rules do make being a landlord as a higher rate tax payer with a mortgage hard to justify. In fairness they were brought in to discourage buy to let and are probably working!
Dependent on your finances you could consider pension contributions to reduce your tax burden.
Is your daughter old enoughto have it now/?
No she is only 5. Some day!
Thanks yes I need to check if I am maximizing my contributions to pension.
I agree the policy is very discouraging for buy to let. I bought the property 8yrs ago and lived in it a few years before getting married and buying another place with my husband.
I’d be tempted to sell. You will presumably have had good capital growth over the 8 years which will currently be mainly tax free as you have lived in it. If you keep it a higher proportion of previous gains will be subject to capital gains tax, which is likely to rise to 40% and is still payable if you gift the property (based on market values) , so it is likely to cost you a lot of tax to give it way in future! Personally I think it would be better to Invest in something more tax efficient and then gift that money in future if you want to, and will save you a lot of hassle.
I suspect that this property is going to become an unviable investment over the next few years as legislation tightens around health and safety and energy performance. I agree with Richard. You should sell it now and perhaps set up a fund for you daughter instead.
I will explore this. My added challenge is I am a US citizen as well so I pay taxes here and will need to pay capital gains tax in the US (they are one of 2 countries in the world with citizen based taxation!). And as a US citizen my investment opportunities are severely limited by tax treatment in the US. Am getting advice from a dual US/UK accountant but basically am damned either way unless I renounce my citizenship which I am also considering.
sorry for long story but thanks for hearing me moan!
Have you considered increasing the rent? 
Maybe it’s worth selling then buying (or swapping with) a more modern fixer-upper that has more room to appreciate in the 18 years before your daughter will need it and won’t present her with constant maintenance problems.
I wouldn’t leave the property market completely just yet.
Is your husband a basic rate tax payer? If so, husband/wife transfers are at no loss/no gain for UK capital gains tax, so you could look at transferring it to him. Although, if you have a mortgage on it, there could be implications for stamp duty and obviously you’d have to remortgage in his name. And I’ve no idea re US tax!
If it is an expensive old house, if it was me, I would probably look at selling it (if you could transfer half to your husband before selling as things stand, you’d get two CGT allowances for UK CGT, but that might change in the budget on 3 March). If you want the investment for your daughter, you could then buy a couple of more modern houses if you have enough cash. If you are higher rate tax payers, it might be worth buying through a limited company if you don’t need the rental income then you can let it build up in the company at corporation tax rates. There are pluses and minuses to that though!
Just seen that you used to live in the property. The period you lived in it and the last 9 months (edited from 18 - was still in 2019-20 tax mode!) will be tax free. In those circumstances you might not want to transfer any to your husband if you are selling because he would inherit the cost, but not your occupation history. (Again, UK tax, no idea about US!)
Obvious But,
Have you tried absolutely minimising the interest paid, so you minimise the previously deductable expense and therefore the pain.
There are many good deals around at the moment starting at around 1.5 % or 1.7% for 5 years !!
Should you really be complaining ?
If you can’t make the property work with a mortgage at these rates, maybe its a bad investment.
It’s not the tax that’s unfair,… as long as the Country has decent services that is to make up for it !
Living in Australia and paying 50% tax at one point was fine, as the quality of life was superb !
S.
Hi Andrea, I am in the same position as you - had no idea the tax bill would hit this hard! That said, a profit of £249 doesn’t seem too bad to me, if in addition to that the rent is paying the mortgage. I’m actually operating at a loss myself (service charge isn’t helping!) but mortgage is being paid, so factoring that in, it looks like a net gain.
My partner is a US citizen and we’re considering the tax implications of either/both of us gaining dual nationality. Would you mind sharing the details of your US/UK accountant, if you recommend them?
It sounds like a nice property and one that should be doing well. Of course it depends on many factors, such as the location and availability of tenants, a well-priced rent, the state of repair and the size and cost of your mortgage. Some of these things you can influence which would result in a higher profit.
Regarding your “after tax” profit, the tax on your rental property must have been tiny. If your tax bill was large then it must be influenced by other factors, not just your rental property.
There is a legal way but the P&L goes to a special trust. So that means you pay any capital gains to move it into the trust then it’s there for whoever.
Sorry to jump in here but aren’t basic rate tax payers hit equally hard now that their mortgage interest payments are no longer allowable expenses?
No, landlords can claim a 20% tax credit against mortgage interest which for most basic rate taxpayers will mean there is no additional tax, although if you are close to higher rate threshold the rent (rather than profit) can mean more of a tax liability than under the old rules.
Thanks Richard, but doesn’t that just mean that they can only claim 20% of the mortgage interest costs, whereas before they could claim 100% of it?
No, you claim 100% of your mortgage cost, but only at 20%. So, if you’re a 20% tax payer, it’s the same end result.
It can push into 40% though, if your income before interest is above the threshold.
So, 10k profit before interest, 10k interest. (ie no profit)
20% tax payer: Tax bill is 10k at 20% =2k. Interest credit of 10k at 20% =2k. Tax due nil.
40% tax payer: Tax bill is 10k at 40% =4k. Tax credit at 20%=2k. Tax due 2k.
NB This is based on the rules for 20-21. Prior to that some could still be claimed as a normal tax deduction.
Your option is to transfer the property into a limited company and then you are able to offset interest payment against rent and pay dividend to yourself. If your partner has lower income bracket or not liable to UK tax then it would be good to have her on the company and she gets the full dividend payment.
You need tax advice.