The Best Scenario For Me As A Landlord?

[Ryan_H]

Hello there,

Long story short, I own my flat in Bristol with two mortgages and now I am expecting to buy a house together with my partner but still keep the flat as a private landlord.

I am trying to figure out if the numbers look okay financially for me. But I’ve been scratching my head around and still haven’t worked it out. I am hoping if you could share some wisdom as a more experienced landlord.

1. The flat would be valued somewhere between £220,000-£230,000. Current mortgage balance is £160,000, but I will need to borrow £25,000 from my current lender to cover the stamp duty, legal, and move-in related cost of the new house.

2. House - buy with partner is £350,000. The ownership of the house may look like Partner owns 65%, and I own 35%.

I will pay the whole stamp duty, which is roughly £15,500. So far, it’s all okay. But when it comes to renting my flat out after the purchase, this is where I am confused.

The potential rent I’ll be charging is £1200 pcm. Service charge will be borne by me which stands at £176 a month. Flat is in a good location, so don’t expect it to be an empty room for more than a month annually.

The three mortgages (Two existing ones + additional borrowing) for the flat will come to £979 a month. I am currently employed earning just on the edge of 40% tax bracket, so this new rental income will be taxed at 40%.

I want to minimise the tax on this rental income to 20%, but I am not sure how to achieve this. Also, I’m doing salary sacrifice with my employer and my net pay is actually less than before sacrificing.

If I can manage to only pay 20% on the rental, I’ll only need to possibly pay somewhere between £300-£400 after the tax and expenses. Bear in mind, I’ll also have one more mortgage to pay on the new house, which will be around 660.

Thank you so much for reading it this far. Really sorry for such a long story. I am wondering all of the above, does it look okay to you? Am I missing anything? I’ve never been a landlord and would appreciate some feedback etc.

Thank you.

[David122]

Have you factored in the additional 3% stamp duty on the purchase for owning more than one property?

All landlords would like to pay only 20% tax, but if your in the 40% bracket, thats the tax you pay. I wouldnt recommend any complex company/LLP/Trust structures to get around this either. HMRC are clamping down on tax avoidance schemes. You should be celebrating the fact that your income has risen to that level. At least youll also get tax relief at 40% on your costs, (except the mortgage of course).

Do you have consent to let from your lender and freeholder? You should also check your insurance.

[Richard19]

I dont really see this as viable. I cant see how you would pass the mortgage requirements for a buy to let mortgage, generally you need 25% equity miminum but rent generally needs to cover 145% of mortgage amount which it clearly wont. At some stage your existing mortgages would need to be moved to a buy to let basis.

To break numbers down your rent is £1200 pm, less your service charge, an allowance for maintenance and void period at best you will get £900 pm before tax and mortgage. 40% tax will reduce this to £540 pm. Mortgage costscwould be around £1100, you would get a tax credit of £220 which all means you would be losing £340 pm and taking a lot of risks (house price fall, tenants doesn’t pay, high maintenance costs) and costing an extra £10k+ on new purchase and doing ablot of work (i havent included management costs).

Salary sacrifice via a pension is an option if you dont need the money and can subsidise the costs from other assets but given you say you need to borrow more dont think this is sensible. It will also reduce your mortgage affordability.

My advice would be not to even consider doing this.