How do tax deductions work for a property I’m renting out? Basic examples…

GreenSheep

I’ve just started letting my property and I’m a little bit confused by what is needed in the way of tax…

Could someone help with this as an example (using round figures for ease):

Lets say I rent out the property for £1000 a month, mortgage is £500 of which £300 is repayment and £200 is interest.
Over a year the rent is £12000.
The interest of the mortgage is £2400.
So do I pay 20% (or 40% for higher) on £9600?
Tax of £1920 (or £3840 for higher)?

Lets say in the year the only work I need to do it repair a broken uPVC window at the property above:

The repair of the window costs me £200 in parts.
Do I also subtract this from the £9600 to give £9400?
Tax of £1880 (or £3760)?

And then the ground rent is £100 a quarter:

Over a year this is £400.
Do I also subtract this from the £9400 to give £9000?
Tax of £1800 (or £3600)?

And so on?

And how do I go about paying this tax? I’d rather not do the PAYE bit so do I need to ring up and register as a sole trader and now do a tax return?

I’ve heard accountancy fees for the bookkeeping of the property are tax deductible so, assuming I’ve got the above right, why doesn’t everyone use an accountant as it is effectively free?
And for that matter why would anyone do repairs to their own property instead of employing someone as they are deductible?

Is there any books worth reading or guides anywhere? I wouldn’t even know what a tax return looked like…

I could have completely grabbed the wrong end of the stick… I don’t really have anyone in the real world for advice here.

Thank you very much for any help you can offer.

martinsurrey

I’m not going to tackle the legal side of being a landlord, only the finance side.

You are right in how you calculate the profit for tax purposes (rent less costs times by tax rate).

This will not be paid through PAYE, it will be done on a self assessment tax return. You need to ring HMRC and tell them that you have income to declare and they will set you up with a simplified SA return, it’s not long or hard IF you keep track of everything as it happens.

Accountants fees are not ‘effectively free’ they are tax deductable so you save the tax element on it. IE you spend £100 on an accountant, £100 leaves your bank account, but you pay £20/£40 less tax, you are still £80/£60 worse off in cash terms than if you had done it yourself. It’s the same with repairs.

I would say that with your lack of knowledge, an accountant and a subscription to a landlord association would be money very well spent.

GreenSheep

Martin,

Thank you very much for your reply. I've actually got the legal side nailed so thank you for sticking to finance.

Unfortunately I didn't follow some:

You say my calculations are right yet then say I can only save £20/40 per £100 on repairs.
Can we go back to my example of repairing a uPVC window...
Let's say I did it and it cost me £200 in parts. Does that whole £200 come off my tax bill?
Let's also say I paid someone to do the same repair at £200 for parts and £200 for labour. How does that differ?

Thank you very much so far.

GreenSheep

You know that moment where you realise you've asked a very stupid question...

Thank you for your help Martin!

Maybe this will be less stupid:

How does mileage work?
Using the 45p rate do I pay 36/27p?

Cheers!

CLAPTON

GreenSheep wrote: »

You know that moment where you realise you've asked a very stupid question...

Thank you for your help Martin!

Maybe this will be less stupid:

How does mileage work?
Using the 45p rate do I pay 36/27p?

Cheers!

basically all allowance work in this general way

profit = income less allowable deductions


tax is 20% or 40% of the profit


so when you spend anything that is deductable you have a reduction in your tax bill of 20 or 40 % leaving you to pay the 80% or 60% yourself.

so mileage works the same way .. it is part of allowable deductions so you get a tax reduction of 20/40% and pay 60/80% yourself

Kynthia

You need to calculate your taxable profit, which is your income less your allowable expenses. Then you pay tax on the taxable profit figure. For example:
Rental income - £6000
Mortgage interest - £3600
Repairs - £200
Insurance - £100
10% wear & tear allowance - £600
Taxable profit - £1500
Then you'll pay tax based on a percentage of this £1500.

Taxable profit is different to cash profit, this is because some 'allowable expenses' differ from the cash that leaves your bank account. For example the repayment element of the mortgage is not an allowable expense and the wear and tear allowance isn't a cash expense.

Thrugelmir

The rate of income tax you'll pay is dependent upon your total earnings for the year. So the net profit from letting the property would be added to your gross earnings from your full time employment.

To make life easier running the income and expenses through a separate bank account would make sense. When claiming mileage remember to detail the trip .