After inheriting some money a few years back, I decided to invest in a buy-to-let apartment using part of it as a deposit. Although the net profit after covering mortgage expenses is limited, my long-term strategy relies on the potential for property value appreciation and the expectation that mortgage rates will eventually decrease.

However, I recently learned from my accountant that the entirety of my rental income (rather than just my profit) is subject to taxation. This situation pushes my overall income above the £100,000 threshold, resulting in the loss of some personal tax allowances and disqualifying me from tax-free childcare. Is this interpretation accurate? It feels profoundly unjust. Michael, Cambridge

Unfortunately, it is just as unfair as it appears. This particular aspect of tax regulation can have a significant negative impact on private landlords.

HMRC assesses your eligibility for personal allowances and child-related benefits based on what is termed your “adjusted net income,” which represents your total income from various sources after specific adjustments. When computing this total, your rental income is included, but only general expenses like repairs and letting agent fees can be deducted—mortgage interest cannot be deducted.

For instance, if your rental property generates £25,000 in income after covering non-financial costs and you pay £15,000 in mortgage interest, the full £25,000 is added to your total income during this calculation. It’s only after this determination that you can apply a £3,000 tax credit, which represents 20 percent of your £15,000 mortgage interest.

This approach may result in losing your personal allowance, creating an effective tax rate of 60 percent on earnings between £100,000 and £125,140, even if your actual profit is substantially lower.

This particular scenario has led numerous individual landlords to shift to limited company structures since the implementation of these regulations. In a corporate structure, mortgage interest can still be fully deducted. Therefore, a company generating £25,000 in rental income with £15,000 in mortgage interest would only report £10,000 as taxable profit.

However, moving your property into a limited company would require paying stamp duty and may incur capital gains tax (CGT), not to mention potential early repayment charges on the existing mortgage. While this can be a significant financial burden, it is a strategy worth considering if you plan to retain the property long-term. Given the likelihood that your income and rental demand will grow faster than tax bands, you might want to evaluate this option when your current mortgage is nearing its end. This consideration is especially relevant if you’re open to leaving profits within the company, as withdrawing salary or dividends would subject you to additional taxation.

Alternatively, to mitigate the impact of your income exceeding the threshold, one strategy could be to contribute to a personal pension or utilize salary sacrifice to reduce your net income below the £100,000 limit. If the property is owned jointly with a lower-earning spouse, discussing ownership restructuring with your accountant may also be advantageous.

Seeking Guidance on Selling My Rental Property

I have been attempting to sell a property that I rented to a family for the last 16 years. Upon their departure, I discovered the property in a much worse state than anticipated. It has remained on the market for six months, yet potential buyers seem disinterested due to the significant renovations required.

According to the estate agent, refurbishing the property myself is not advisable, as the costs would approximately total £60,000, and with the current asking price at £295,000 (down from £340,000), any sale wouldn’t cover the expenditure sufficiently. The ongoing cost of an unoccupied property due to council tax is becoming a financial strain. What should I do? Eira, Cheltenham

With data from Rightmove indicating more choices for homebuyers than anytime since 2019, you are certainly not alone in your struggles as a seller. However, the lack of substantial interest in your property over the past six months suggests that a reevaluation of your sales strategy is necessary.

Homebuyer preferences can vary widely depending on location and property type, but there is a discernible trend toward buyers seeking “move-in ready” homes, particularly given the current market’s predominance of first-time buyers over investors.

In light of this, investing £60,000 to potentially raise the property’s value by a similar amount may not be unreasonable if it significantly accelerates your chances of finding a buyer. The compounding costs of holding the property mean you could end up with a better financial outcome. Nevertheless, renovation entails considerable effort and carries the risk of escalating costs, especially if you lack prior experience managing such projects. Given these uncertainties and any potential CGT implications based on the type of renovations, pursuing improvements might be a last resort.

A more balanced approach might involve smaller investments focused on highly visible updates. Simple enhancements like applying fresh paint, new flooring, or minor kitchen or bathroom modifications could significantly impact how buyers perceive the property while keeping expenditures manageable. Furthermore, addressing any structural issues or severe dampness could help facilitate conventional mortgage financing for prospective buyers.

If these routes seem unviable, a more considerable reduction in the asking price may be necessary. In a robust market, properties can be sold at prices that don’t incentivize full renovations, primarily because buyers have fewer alternatives and anticipate rising values overall. However, in the cooler market we are currently experiencing, sufficient price margins must exist to motivate potential buyers to undertake repair projects, necessitating a price cut.

If renovations are off the table, consider selling the property at auction, which often appeals to investors looking for projects. However, this option isn’t without its challenges, including higher fees and no guarantees of a sale. Still, strong demand at the auction could yield a favorable sale price.

Should you decide to proceed with a traditional sale, changing your estate agent could provide a fresh perspective. A new marketing approach and a revised pricing strategy might result in improved sale prospects.

For further inquiries, submit your questions for the expert duo at propertyhub.net/sundaytimes

Rob Dix and Rob Bence are the hosts of The Property Podcast and the co-founders of the property education platform Property Hub.