An Alternative To High Residential BTL Taxes

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Residential buy-to-let properties were great investments for private landlords when we were able to offset the mortgage interest payments and take advantage of significant tax relief. 

Even low yield properties were profitable because owners would only pay tax for the difference between the yearly rental income and annual mortgage interest payment.

If the landlord made £10,000 a year in rental income, for example, and had to pay a total of £8,000 in mortgage interests, the taxable amount would only be £2,000. Depending on their tax bracket, the tax bill would vary, but the numbers were often low.

However, after the start of the 2017-18 tax year, the industry faced regulatory changes that increased the amount of tax payment for low yield properties.

An alternative to high residential BTL taxes

Gradually, the government reduced the amount of mortgage interest payments you could deduct from rental income before paying tax. 

Tax Year Percentage of mortgage interest payments deductible from rental income Percentage of mortgage interest payments qualifying for the new 20% tax credit
Before 2017-18 tax year 100% 0%
2017-2018 75% 25%
2018-2019 50% 50%
2019-2020 25% 75%
After April 2020 0% 100%

So, the landlord who was making £10,000 a year before 2017 had to pay tax only over the residual £2,000. 

However, now in 2020, he or she will pay tax over the full £10,000, with tax relief of 20% of the £8,000 mortgage interest payments.

If this landlord falls in the 45% rental income tax bracket, these would be the changes:

Before 2017:  In 2020:
£10,000 (full rental income) – £8,000 (mortgage interest payments) = £2,000
£2,000 x 45% 
£8,000 x 20% tax relief = £1,600
£10,000 x 45% = £4,500
Tax bill on rental income = £900 Tax bill on rental income = £4,500 – £1,600 = £2,900

Landlords in higher tax brackets will find that low yield BTLs will not be as profitable as they used to be, and they could be even losing money in this process.

And that is why low yield BTLs make no sense anymore

We also need to remember all the costs that come with owning a BTL property, such as management, maintenance, and the mortgage itself (which can no longer be deducted).

If you are a landlord who is likely to profit less (or lose money) in this new system, there is an alternative to avoid the very high taxes.

We recommend changing your low yield residential single BTL to the holiday let category. 

What are holiday lets?

A profitable venture, the holiday let takes advantage of special tax statuses. 

This rental classification is for holiday homes that should be let for at least 105 days a year. Although the name refers to holiday purposes, holiday lets are not required to be in a tourist-friendly location with resorts and near the sea, for example. 

modern staged sofa in serviced apartment

Often, a holiday let is rented in other types of situation. People travelling for work and short-term stays frequently choose a holiday let over a hotel stay. Companies and corporations can also rent a holiday let to keep the employees more comfortable and in one place, for example.  

Benefits of holiday lets on a tax-perspective

When it comes to tax, the holiday let category does not suffer from the tax relief phasing out on BTL mortgages. So, landlords who had a holiday let before 2017 are paying the same percentual amount of tax today. 

To compare BTLs with a holiday let, this is an indicative example of on a £300,000 house, with £225,000 mortgage, with £1,000 monthly rent:

  • In 2015 you would make nearly £3,000 after tax as a residential BTL
  • 2020 – you would make a loss after tax as a residential BTL
  • … and in 2020 as a holiday let you would make over £2,000

There are many other tax-related benefits for furnished holiday let properties. For instance, the profits will count as earnings for pension purposes, and you will be exempt from paying stamp duty and council tax. 

Some expenses you have in the holiday let can also be used as tax relief, such as insurance, accounting fees, and, of course, mortgage or loan interests.

How can we help?

Differently from residential BTL, the holiday let industry is in hospitality, not passive property management. This way, the high street letting agents are not set-up to manage your property on this basis. We specialise precisely in that, making sure the running is as hands-free as it would be letting your single BTL out. You will receive a monthly statement along with payment on your fully managed holiday let serviced accommodation property.

We specialise in knowing local and visiting businesses. 

Working with businesses in providing self-catering accommodation, we can help you overcome the negative tax impact you have faced and amplify the profits you’ll make in the future. 

Let’s talk anytime and discuss your situation and individual needs.