Tax on Rental Profit

rob_o4

I bought my own house 5 years ago, and lived in it for 4 years. Last year I moved in with my girlfriend and started renting out my property - I've been asked to complete an SA which includes rental profit - but mortgage payments don't count towards calculating the profit?? And I understand that soon mortgage interest won't either?? What?!

Can someone explain how/why this works?

Say I charged my tenants £1,000 per month, my rental income would be £12,000.
I use a letting company to manage the property and other expenses such as insurances come to £2,000 per year, giving me a 'profit' of £10,000 which would then be taxed? I'm already in the higher tax band, so would assume I'll be taxed 40% on this which would be £4,000, giving me a virtual 'profit' of £6,000

My mortgage is say £700 a month though, so I'm paying £8,400 a year. So I'm being taxed for 'profit' on something which isn't profitable?

Surely my mortgage payment needs to be included when calculating the profit from rental income, otherwise it isn't profit?!?

BoGoF

Taxable profits and 'actual' profits are 2 different things.

You cant claim for capital repayments on your mortgage and as you have discovered the rules on claiming interest are changing.

Mahsroh

As BoGoF has said, and you have alluded to, you can only claim the mortgage interest at the moment. The capital repayment part of your mortgage is exactly that - capital - so you cant claim it. The only true "cost" to you, is the interest. So if you're mortgage payment is £700 and £250 of that is capital repayment and £450 is interest, you can only claim the £450 as an expense (as you've already said, from the 17/18 tax year, the rules on this are changing to restrict the amount of tax relief you can claim).


Under the new rules, if you're in the 40% tax bracket then you will still claim some relief on you mortgage interest, but you can only claim 20% relief instead of 40% relief, and this is being phased in gradually over 4 years.


More info here which includes a good example, and a calculator so you can see how the new rules affect you.
http://www.telegraph.co.uk/investing/buy-to-let/new-buy-to-let-tax-works-andhow-beat/

00ec25

rob_o4 wrote: »

My mortgage is say £700 a month though, so I'm paying £8,400 a year. So I'm being taxed for 'profit' on something which isn't profitable?

you have (presumably) a REPAYMENT mortgage

a repayment mortgage means that you borrowed a lump sum of money (the "capital") which you have to repay in full + interest charged on the outstanding capital balance

you spent that capital on buying a property

your net wealth comprises :
a) property
less
b) balance outstanding of the borrowed capital

each monthly mortgage payment you make comprises a bit of capital repayment and a bit of interest

why on earth do you think the capital element should be tax deductible? Every £1 of capital you repay is a £1 increase in your personal wealth. It is not money you have spent that you will never see again.

In contrast the interest you pay is money you have spent that you will never see again

that is why you cannot claim the capital element of your mortgage, because it is not something you have lost! Your profit comprises the excess of rent - allowable costs + your increased equity in the property (the amount of capital you have repaid).

Surprised you became a landlord without understanding how your finances would work, especially as you are a higher rate taxpayer?

kidmugsy

Make some pension contributions to take you out of the higher rate band. Or sell the house. Property letting is going to be decreasingly attractive for Higher Rate taxpayers.

Wayne_O_Mac

rob_o4 wrote: »

I bought my own house 5 years ago, and lived in it for 4 years. Last year I moved in with my girlfriend and started renting out my property - I've been asked to complete an SA which includes rental profit - but mortgage payments don't count towards calculating the profit?? And I understand that soon mortgage interest won't either?? What?!

Can someone explain how/why this works?

Using very round figures as an example, and ignoring interest since we're just illustrating the point re capital:
You borrow £50,000 from the bank, repayable over ten years. You use this money to buy a house.
You let the house out at £5,000 a year. Your mortgage payments are £5,000, so you deduct these. No profit, no tax.
After ten years the house is fully paid off, you have a £50,000 house, the tenant has effectively bought it for you tax-free.

(Text removed by MSE Forum Team)