Second house - Tax

scarletjim

Cleaver wrote: »

Expenses
Agency Fee = 8% of rent, so £361 a year. I'd get an agent to manage this for you, as you don't sound an experienced landlord. My old agency charged 12% but I got them down to 8%.
Gas and Leccy Safety Checks = £150 a year
Landlord Insurance = £150 a year
Mortgage Interest = £3,000 a year
Mortgage Capital = £960 a year
Maintenance = £316 a year (I rented a property for a number of years and found that on average we paid out 7% on fixing stuff, so I've assumed the same for you. Tenants will probably ask for things to be fixed that homeowners might just leave be, quite rightly really).

Total Expenses = £4,937

So, according to my very basic fees (but hopefully quite realistic) you'd be running a loss of £422 a year, or £35 a month. So you'd have no tax to pay, as you'd make a loss. You'd still need to fill in a tax form though.

I'm a bit confused by this calc - surely you are only allowed to include the interest element of the mortgage, therefore for tax purposes there is a profit and so some tax to pay. As a business venture you might assess it as a loss as above, but surely for tax purposes there is a profit? Is that right?

Cleaver

scarletjim wrote: »

I'm a bit confused by this calc - surely you are only allowed to include the interest element of the mortgage, therefore for tax purposes there is a profit and so some tax to pay. As a business venture you might assess it as a loss as above, but surely for tax purposes there is a profit? Is that right?

Apologies, yeah, I've just realised that! Silly thing to say and you're quite right.

OP: what I should have said is that if you continue on a repayment mortgage you probably will be in profit in terms of the tax man, but this obviously depends on how much your interest is per month. If it's £250 of your payment then your profit will be £538 a year, or £44 a month. If you're a basic rate tax payer you'll then pay also pay it on this amount.

But as I said, if you remain on a repayment mortgage then you'll have to pay some money out each month towards the house. So it's a tax profit but might feel like a loss to you!

Fuzzythinking

scarletjim wrote: »

I'm a bit confused by this calc - surely you are only allowed to include the interest element of the mortgage, therefore for tax purposes there is a profit and so some tax to pay. As a business venture you might assess it as a loss as above, but surely for tax purposes there is a profit? Is that right?

I am overwhelmed with these cost but I do not fully understand the morgtage interest and captial. Please explain these for me?

FT

Cleaver

Fuzzythinking wrote: »

I am overwhelmed with these cost but I do not fully understand the morgtage interest and captial. Please explain these for me?

FT

I mean no offence, but maybe renting out a house isn't for you if don't understand these things.

When you pay your mortgage to your bank the payment is made up of two types: interest and capital. The interest is essentially your fee to the bank for your loan. It doesn't pay off any of your mortgage and is how the bank makes money from you. The capital part of the payment is the bit that actually pays off the loan.

For example. Let's say your mortgage is currently £100,000. You make your standard direct debit / standing order mortgage payment in April 2011 of £591 (which is how much you'd pay on a 25 year remaining 5% mortgage). Of this £591 payment, around £416 is simply interest and around £175 actually goes to paying off your loan.

So after you make a payment of £591 towards your £100,000 loan, the bank takes £416 as a 'thank you very much, we'll take that' payment, and they pay £175 off your mortgage for you. So your loan is now down to £99,825. The longer a mortgage goes on, the more you're paying off the capital and the less you're giving the bank in the form of interest. It's why a lot of people try to overpay on their mortgage, especially in the early days.

When you rent out a house, you can only claim tax-relief against the interest part of your mortgage payment.

I don't mean to be cheeky, but have you had a mortgage up to now without knowing that this is how they work?

scarletjim

Cleaver can probably do this better than me but I'll try! Yes he/she did! lol

If you have a repayment mortgage, then your monthly mortgage payment is made up of two elements:

Interest element - payment of interest on the outstanding amount of the loan, so in the early years this is a bigger part of the overall payment, but reduces in the later years as the outstanding loan itself reduces.

Capital element - this is the repayment of the loan itself.

As an example, say I lent you £100 but with interest, and I asked you to pay me back £10 per month for a year, then overall you'd be paying me £120. Each month, some of your payment to me would be repaying the loan itself, and some would be paying the interest.

Hope that helps.

zappahey

Cleaver wrote: »

I don't mean to be cheeky, but have you had a mortgage up to now without knowing that this is how they work?

In the OP's defence, I suspect it's not all that unusual.

Cleaver

scarletjim wrote: »

Cleaver can probably do this better than me but I'll try! Yes he/she did! lol

I'm sure having two examples can only help.

Cleaver

zappahey wrote: »

In the OP's defence, I suspect it's not all that unusual.

Yeah, you're probably right. Doesn't make it any less worrying though. I suppose if you don't understand it and just own a house it's a bit of a worry rather than a problem. But the OP is, essentially, thinking of starting a business in this area though, which probably isn't advised if you don't really know the fundamental basics (no offence meant OP).

Fuzzythinking

Cleaver wrote: »

I mean no offence, but maybe renting out a house isn't for you if don't understand these things.

When you pay your mortgage to your bank the payment is made up of two types: interest and capital. The interest is essentially your fee to the bank for your loan. It doesn't pay off any of your mortgage and is how the bank makes money from you. The capital part of the payment is the bit that actually pays off the loan.

For example. Let's say your mortgage is currently £100,000. You make your standard direct debit / standing order mortgage payment in April 2011 of £591 (which is how much you'd pay on a 25 year remaining 5% mortgage). Of this £591 payment, around £416 is simply interest and around £175 actually goes to paying off your loan.

So after you make a payment of £591 towards your £100,000 loan, the bank takes £416 as a 'thank you very much, we'll take that' payment, and they pay £175 off your mortgage for you. So your loan is now down to £99,825. The longer a mortgage goes on, the more you're paying off the capital and the less you're giving the bank in the form of interest. It's why a lot of people try to overpay on their mortgage, especially in the early days.

When you rent out a house, you can only claim tax-relief against the interest part of your mortgage payment.

I don't mean to be cheeky, but have you had a mortgage up to now without knowing that this is how they work?

No offence taken, I want to be 100% sure that I did not miss out anything important. I have a clear idea what to do next. In fact, I am glad that you worked out the expense which clearly help me very much. For my morgtage, I am lucky to have family support to give me a direction which morgtage I should. In the mean time, I never stop learning new things every day. Since I have asked the question which I have learnt from you and I have been a fool for 5 mins!

Thank you guys for your clear and conise clarification.

Regards

FT

zappahey

I'm fairly sure my parents just saw it as a bill they had to pay for 25 years to buy their house.

As for the OP, they really need to take some specialist advice on the life of a landlord, it's not necessarily a case of sit back and collect the rent. We rented a place out during an overseas tour and, frankly, I wouldn't do it again through choice.