Poised for BTL but how does Tax relief work?

martinsurrey

one other thing to remember,

Only the INTEREST on the mortgage can be offset against income.

The capital element is not allowable for income tax purposes.

which means as you pay off more of the mortgage, you pay more tax.

Doogle2

Thanks again guys. I know its only the interest on the mortgage that can be used for tax relief, but I have read that agent fees and insurance can also be counted towards tax relief, which could explain to you why my estimate is higher. This is where I get a surplus of tax relief on the £50 profit that I calculated and therefore hoped I could use it on other non BTL income. Sadly it seems that I cant.

I hope to get my teeth into this again soon, so I'll put all my calcs on here soon, so that you can see how I've come to my conclusions and perhaps tell me where I've gone wrong or what I've missed.

googler

I think part of the problem may be your use of the term 'relief' - my understanding of tax relief is that it's an exemption, a special case as defined by HMRC.

As pointed out earlier, you're not building up a tax 'relief' by adding up your expenses - you're calculating a figure to offset against your income.

Income less expenses = Business Profit, upon which tax is payable.

If you make a loss - your expenses are greater than your income - then there are HMRC rules on how you carry forward that loss, and offset it against next year's profit (if there is one)

By all means, let's see your calcs.

Have you read this HMRC guide?

Graham_Devon

£49.80 isn't much for maintenance for a year. You'd struggle to get a call out for that! You might not need any maintenance at all, but I somehow doubt it. Just painting a couple of rooms yourself would eat pretty much all of that budget!

Doogle2

Ok, here goes, based on per month costs....

Property Value: £70000 (2 Bed Flat)
Deposit: £25000
Renovation: £5000

Income
======
Rent: £450

Expences
========
Mortgage: £240 (4.5% Interest, repayment over 30 year)
Gas Inpections: £8
Agent Fees*: £70 (Full services)
Legal Fees: £5
BTL Insurance: £20
Ground Rent: £10 (A guess!)
Repairs: £45 (10% of rent)
Tenant Refs*: Inc with Agent Fee
Inventory*: Inc with Agent Fee

Total Expences PM: 398

Monthly Profit: (450-398) £52 (Rounded down to £50)

Allowable Tax Relief = (Interest+Agent Fee+Insurance) 175+70+20 = £265

Now I've given it more thought, does tax relief mean that out of the £450 rent, I'd only pay income tax on (450 - 265) £185 of my rent income?

If this is the case, given my meager £50 profit, the tax means I'll be at a loss. If this is the case, I'll have to explore the options of getting less services from an agent or have I got something wrong!!!

Advice appreciated as always.

whalster

was a prod at agent costs to benefit ,the thing I was driving at is that you or the OP is throwing away 10% of his rental income by using an agent when it is simple to manage the let using the information out there

googler

Repairs are allowed as a deduction against Rental Income. It says so in the HMRC guide that I linked to earlier - have you read it, or other sections of the HMRC website in the same vein? So your taxable per mth drops to £140

00ec25

googler wrote: »

Repairs are allowed as a deduction against Rental Income. It says so in the HMRC guide that I linked to earlier - have you read it, or other sections of the HMRC website in the same vein? So your taxable per mth drops to £140

the OP is making a provision for repairs at 10% of their rental income. Provisions are not an eligible costs, the costs claimed must be actual spent, not estimates
the exception is where the property is let as fully furnished and the LL chooses the 10% wear and tear allowance option rather than the actual costs replacement method

OP please read the guide googler listed. Also read the HMRC property income manual from cover to cover
http://www.hmrc.gov.uk/manuals/pimmanual/index.htm

from your list - actual (not estimated!) ground rent is an eligible cost
I assume your £5 per month legal fees is a provision rather than actual? Fees releated to the property purchase are allowable against CGT not income tax, fees for rental contract and/or evictions etc are allowable against rent

00ec25

Doogle2 wrote: »

Income
======
Rent: £450

Expences
========
Mortgage: £240 (4.5% Interest, repayment over 30 year) interest 175 allowable
Gas Inpections: £8 allowable (assume you mean the safety certificate and any maintenance contract)
Agent Fees*: £70 (Full services) allowable
Legal Fees: £5 for what ?
BTL Insurance: £20 allowable
Ground Rent: £10 (A guess!) allowable
Repairs: £45 (10% of rent) provision - not allowed
Tenant Refs*: Inc with Agent Fee
Inventory*: Inc with Agent Fee

Total Expences PM: 398

Monthly Profit: (450-398) £52 (Rounded down to £50)

Allowable Tax Relief = (Interest+Agent Fee+Insurance) 175+70+20+10+8 = £265 £283

Now I've given it more thought, does tax relief mean that out of the £450 rent, I'd only pay income tax on (450 - 265) £185 of my rent income?

If this is the case, given my meager £50 profit, the tax means I'll be at a loss.No it won't, do your maths again!

using the above as an example your taxable net profit is 450 - 283 = 167 @20% tax (assuming you are basic rate payer) = 33.40

in cash terms you actual income is 450 - 398 - 33 = £19 profit per month assuming you do actually spend 45 pm on repairs

Doogle2

Whalster: I was thinking the same thing. The reason for the agent inclusion was to soften the blow for my first BTL and learn from what they have done... or not done!!!

Googler: Thanks for that. I guess I'll be needing an accountant for my 1st BTL as well to track all repair costs against tax.

OOec25: Thanks for the corrections. Unfortunately for BTL, I creap into the 40% tax margin, so the tax will wipe out the profit, so as Whalster says, I may have to omit or reduce the services of an agent.

I've not read the links in detail yet, but I will, as I want to make sure I go into this at least covering my costs, with the long term goal of paying it all off and having a bit extra for my pension.

Now I'm thinking that I'll need to add accountant costs and the cost of maintaining a business name. :doh: