Reply to: What's wrong with my B2L plan?

[WordIsBond]

Isn't rental income classed as 'non earned' income and therefore not available for SIPP tax relief?

Good point but presumably OP is paying himself a salary from his LtdCo and that's going to be more than the rental income for the property he's described.

[PhiltheGreek]

Basically, yeah. It wouldn't be different to any other personal pension contributions. Be a bit careful about the limits (remember personal pension contributions are not only limited by the annual/lifetime caps, but also your "net relevant earnings", which importantly for small biz owners excludes dividends). Otherwise, if you put in £800 (of your own, after tax money), the pension scheme reclaims £200 from HMRC leading to £1,000 in the pension. You then declare on your personal tax return a £1,000 personal pension contribution, which extends your basic rate band, meaning a bit more of your income is taxed at basic rate rather than higher rate. Ie the pension scheme gets the basic rate tax relief for the contribution, you then get the higher rate relief.

Isn't rental income classed as 'non earned' income and therefore not available for SIPP tax relief?

[GhostofTarbera]

Eh? It's a B2L, I'm never going to live there. I've got a lovely place in leafy Surrey.



Depends on your definition of professional I guess. It's pretty close to a big hospital. It's pretty close to the airport. It's pretty close to some schools. Am I going to get contractors paying me thousands a month? Nope. Do I care? Nope. As long as the rent covers the mortgage and part funds my pension I can't see a down side. It's unlikely the market will completely collapse and I'll lose everything.

Go for it then

Personally I would enjoy myself now, rather than when I’m old and almost deed in retirement

Jesues


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[Lance]

Eh? It's a B2L, I'm never going to live there. I've got a lovely place in leafy Surrey.



Depends on your definition of professional I guess. It's pretty close to a big hospital. It's pretty close to the airport. It's pretty close to some schools. Am I going to get contractors paying me thousands a month? Nope. Do I care? Nope. As long as the rent covers the mortgage and part funds my pension I can't see a down side. It's unlikely the market will completely collapse and I'll lose everything.

fair enough. You asked for advice. I responded.
BTL isn't for me (well not at the moment anyway).
Good luck.

[b0redom]

Nice (not nice)

I don't for all the reasons I mentioned. The rewards are too low for the risk. I'd rather invest in a property I can enjoy by living in it.

Eh? It's a B2L, I'm never going to live there. I've got a lovely place in leafy Surrey.

Small starter homes for professionals in Donnie???? Yeah right.
Wakefield, near the station maybe but it's the arse end of the market. What professionals are going to want that?

Depends on your definition of professional I guess. It's pretty close to a big hospital. It's pretty close to the airport. It's pretty close to some schools. Am I going to get contractors paying me thousands a month? Nope. Do I care? Nope. As long as the rent covers the mortgage and part funds my pension I can't see a down side. It's unlikely the market will completely collapse and I'll lose everything.

[northernladuk]

3. I would tend to disagree with the 4-bed houses comment. My portfolio is all one beds, one two bed aside. Someone is always just about to leave home, or breaking up in a partnership. These flats always tend to go first. Four beds are more niche oriented and can lie fallow for a period.
.

They can but this is all down to your research. Where I live it's pretty desirable so there are just no family properties coming up. Yes 1 and 2 bedders don't stand empty for more than a day but then there is the churn that young couples move here for the area and then find they cannot start a family or lay any roots because of the cost and they move on.

The 4+ properties command a much better rent against cost because they are so desirable and rare. There are a queue of families looking so they won't stay empty more than a week. When they are rented they will be for years and much more likely the house will be looked after if not improved. If you can afford it, the bigger properties are the way to go here. Other areas, as the OP said, maybe not so.

Understanding your area and spotting niches like this can be much more profitable if done properly.

[Lance]

It's not the bottom end of the market where I was looking (Doncaster).

Nice (not nice)

Do you actually do this? I would have thought smaller starter homes (for professionals) would have been way easier to let than big family homes and surely the rental and price are completely dependent on location?

I don't for all the reasons I mentioned. The rewards are too low for the risk. I'd rather invest in a property I can enjoy by living in it.
Small starter homes for professionals in Donnie???? Yeah right.
Wakefield, near the station maybe but it's the arse end of the market. What professionals are going to want that?

Brexit's been looming large for years. At the moment I have cash in the bank which is depreciating in value. If not property then what?

Good question. I'm chucking my surplus at pension but then I can do a cash draw down from that in a few years.

[Maslins]

The property is only £105K right now. It's value may go up but so may thresholds, stamp duty probably isn't likely to be an issue, or a significant one.

Given this is a BTL, I'm assuming it won't be the OP's sole property. I believe the 3% stamp duty surcharge applies on all secondary properties, even those below the normal stamp duty threshold. I appreciate many will still not consider it a significant issue as it's not incurred every year...but given it's 3% of the value of the property, not a % on profits (as the income tax sides typically are) IMHO it's worth bearing in mind.

[simes]

They don't seem right to me.
Those mortgage rates seem very low. And given BTL mortgages cost more, I'd say they are pretty optimistic.
BTL mortgages usually want 25% LTV so a larger deposit will be needed.

£105k for a house is really cheap, even in the north, and likely to be rented by scratters. Don't be surprised if ALL the profit disappears into repairs and defaults.

IMO the only BTLs to consider would be 4 bed family homes, near a train station, for professionals. The rental would be more like £800, and the cost to buy more like £250k. At least the income will be more consistent and repairs cheaper.
Or holiday cottages...

The biggest reason for the BTL boom has been capital increase. This has been somewhat slower for 10 years, and with Brexit looming large I'd be hodling the cash

And all that hassle for less than a day's rate per month. I just don't get it.

Well,

1. He's nearly right with the 25%... A grand here or there isn't a large point of contention.

2. A Ltd Co BTL I bought seven months ago is on an interest only rate of 2.94%, so again, he seems spot on.

3. I would tend to disagree with the 4-bed houses comment. My portfolio is all one beds, one two bed aside. Someone is always just about to leave home, or breaking up in a partnership. These flats always tend to go first. Four beds are more niche oriented and can lie fallow for a period.

4. While one is working, yes, a day's rate does Not seem worth it - especially while paying for your and the BTL mortgages, kids, school and university fees. But, once all that goes, with a handful of such paid off properties, in retirement, it adds up to a reasonable pension - imho.

[Maslins]

So is it possible to dump post tax rental income directly into a SIPP and reclaim the tax?

Basically, yeah. It wouldn't be different to any other personal pension contributions. Be a bit careful about the limits (remember personal pension contributions are not only limited by the annual/lifetime caps, but also your "net relevant earnings", which importantly for small biz owners excludes dividends). Otherwise, if you put in £800 (of your own, after tax money), the pension scheme reclaims £200 from HMRC leading to £1,000 in the pension. You then declare on your personal tax return a £1,000 personal pension contribution, which extends your basic rate band, meaning a bit more of your income is taxed at basic rate rather than higher rate. Ie the pension scheme gets the basic rate tax relief for the contribution, you then get the higher rate relief.

[b0redom]

They don't seem right to me.
Those mortgage rates seem very low. And given BTL mortgages cost more, I'd say they are pretty optimistic.
BTL mortgages usually want 25% LTV so a larger deposit will be needed.

Oops you're right, I was getting a quote for borrowing £75k on a £105k property. Even so I'm only going off what I found with a quick search on moneysupermarket etc.

£105k for a house is really cheap, even in the north, and likely to be rented by scratters. Don't be surprised if ALL the profit disappears into repairs and defaults.

It's not the bottom end of the market where I was looking (Doncaster).

IMO the only BTLs to consider would be 4 bed family homes, near a train station, for professionals. The rental would be more like £800, and the cost to buy more like £250k. At least the income will be more consistent and repairs cheaper.
Or holiday cottages...

Do you actually do this? I would have thought smaller starter homes (for professionals) would have been way easier to let than big family homes and surely the rental and price are completely dependent on location?

The biggest reason for the BTL boom has been capital increase. This has been somewhat slower for 10 years, and with Brexit looming large I'd be hodling the cash

Brexit's been looming large for years. At the moment I have cash in the bank which is depreciating in value. If not property then what?

And all that hassle for less than a day's rate per month. I just don't get it.

[Scruff]

You might want to start here, and attend one of their Webinars?

Help and support for landlords - GOV.UK

[WordIsBond]

Those mortgage rates seem very low. And given BTL mortgages cost more, I'd say they are pretty optimistic.
BTL mortgages usually want 25% LTV so a larger deposit will be needed.

This was an odd comment, he talked about a £25K deposit on a £105K house. So, 25% means he needs £26K....

Any rental profits inside the company will likely suffer personal tax when they come out to you. Hence typically you're delaying tax, rather than saving over the longer term. Yes you could put them into a pension like you suggest, but equally you could do that with personal funds reducing the personal tax impact of owning BTLs personally, so that's not really a differentiator IMHO.

This was also my first thought, which IMO means it is brilliant.

If you are happy to just dump the funds into a pension, then there's a lot to be said for doing it personally, if you have the funds or can extract them from YourCo efficiently. If you are going to have to pay higher rate dividend tax to extract the funds, that has to factor into the decision whether to do it through YourCo or personally.

I wouldn't rely on the current differential in allowability of interest being better for companies to individuals to remain indefinitely. To me it'd be a no brainer that if the govt think the change for personal BTLers worked fairly well, but pushed some to buy via a Ltd Co, the solution would be to use similar rules for Ltd Cos too.

Does seem likely, but.... That would be an issue for a lot of property companies, so it may not happen soon. And my guess is that they aren't going to like what happens to the rental market with their current war on landlords, so it is possible they are going to roll some of this stuff back.

Stamp duty is typically incurred each time a property is sold, and transferring it between your Ltd Co/yourself would count. Ie buying via a Ltd Co now thinking you can transfer to personal ownership in a few years if required is potentially doubling your exposure to stamp duty.

The property is only £105K right now. It's value may go up but so may thresholds, stamp duty probably isn't likely to be an issue, or a significant one.

[Lance]

Erm. Are you sure those numbers are accurate?

They don't seem right to me.
Those mortgage rates seem very low. And given BTL mortgages cost more, I'd say they are pretty optimistic.
BTL mortgages usually want 25% LTV so a larger deposit will be needed.

£105k for a house is really cheap, even in the north, and likely to be rented by scratters. Don't be surprised if ALL the profit disappears into repairs and defaults.

IMO the only BTLs to consider would be 4 bed family homes, near a train station, for professionals. The rental would be more like £800, and the cost to buy more like £250k. At least the income will be more consistent and repairs cheaper.
Or holiday cottages...

The biggest reason for the BTL boom has been capital increase. This has been somewhat slower for 10 years, and with Brexit looming large I'd be hodling the cash


And all that hassle for less than a day's rate per month. I just don't get it.

[GhostofTarbera]

Is your accountant called Darren ?

Tell him to do your books and submit your returns. The profit for a year is a good night out, hardly worth the effort


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