Buy-to-let landlord questions / running fees and tax by you!

vincent.lee

Hello.

I've moved out of my 1 bedroom flat, into a bigger flat with the Mrs.

The 1 bedroom flat belong to me. I currently have a residential mortgage on a consent to let, but will be going to buy to let soon.

I just wanted to run my understanding of the finances by you, to make sure I have everything above board - I would really not like to have an accountant do this, as I'd actually like to get to grips with this (I love it!).

I'm a basic rate tax payer living in Scotland, and the rental income will not push me into the higher earners bracket.

I'll use big round numbers for easier calculation. These costs are Monthly / Annual. I know the interest/capital will change as the principal decreases, but this is just for illustration/educational purposes, for me:

OUTGOINGS

Mortgage Capital Repayment Monthly: £300 / £3600

Mortgage Interest Repayment Monthly: £200 / £2400

Landlords Insurance: £70 / £840

Factor Fee: £50 / £600

Estate Agent Management Fee: £100 (10% of Rental Income) / £1200

Annual Safety Checks: - / £150

INCOME

Rental Income: £1000 a month / £12,000

As per government guidelines, I will be able to get 20% tax credit from the Mortgage Interest = £480

Annual tax to be paid using the formula: ((rental income - all outgoings)*0.2) - tax credit = £162

Is the above correct?

Dazed_and_C0nfused

Your only expenses which may* be eligible to set against your profit appear to be £2,790.

So you will have a profit (for tax purposes) of £9,210.  Tax due could be anywhere from £1,842 to £3,776 but most likely £1,842 (20%) to £1,934 (21%).

You will then be entitled to a tax credit of £480 deductable from your rental income tax liability (assuming it is at least £480 to start with).

*not sure about the factor fee, no doubt someone more clued up on this will post in due course.

oldbikebloke

no it is not correct, because "all outgoings" includes costs that are not tax deductible 
correct answer:
income 12,000 less eligible costs (840+600+1200+150) = taxable profit 9,210
tax on profit 9,210 @ 20% = 1,842
less tax relief on mortgage interest 2400 @ 20% = 480
net tax payable 1,842 - 480 = 1,362

EDIT - I have not done it at Scottish rates, you can do that yourself 

you have fundamentally misunderstood the capital repayment!
You borrowed money to buy the property, as the loan reduces with each capital repayment, you own an increasing share of the property mortgage free, aka "equity". When you sell, the equity is yours to keep, so your personal net worth has increased. Just think about it: if your personal wealth increases why would that be a deduction against tax!. There is no way, shape, or form that a loan capital repayment is going to be a tax cost!

what you need to understand is how you finance the purchase (eg by repaying a loan) has nothing to do with the cost of the business. It is simply money borrowed and repaid. (The interest charged on the loan is different - see next point...)

you have also fundamentally misunderstood the mortgage interest tax relief. You have done exactly what the rules have stopped, you cannot claim the interest payment as a deduction when working out your profit. That is precisely what is not allowed as doing it that way gave people tax relief at their marginal rate. Instead you do as I show above: tax credit knocked off the tax bill as explained in the guidance... https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies


if you intend to DIY, and not pay an accountant who already knows what they are doing, then you need to learn the Property Income Manual so you too know what you are doing
https://www.gov.uk/hmrc-internal-manuals/property-income-manual

I also suggest you start with the simple stuff here: http://www.hmrc.gov.uk/courses/syob3/new_letting/HTML/new_letting_menu.html

and the really simple stuff
https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income

oldbikebloke

Dazed_and_C0nfused said:

*not sure about the factor fee, no doubt someone more clued up on this will post in due course.

If the landlord is the property owner, then any costs incurred by the owner based on the ongoing existence of the property are eligible costs since they are incurred as part of the business of making the flat available for letting, given the LL is not at the same living in it himself.

factor fees are no different in principle to service charges, both are payable because the flat exists. They are deductible against the rental income because, in Op's case, he is simultaneously the owner liable for those costs and the landlord who is paying them    

Grumpy_chap

I am not going to comment on the tax, but why is the LL insurance £800 per year?  That seems very expensive and worth obtaining competitive quotes.  The OP may have chosen a very high level of cover, which is their choice and may give peace-of-mind, but still worth checking the estimate is correct.

vincent.lee

oldbikebloke said:

no it is not correct, because "all outgoings" includes costs that are not tax deductible 
correct answer:
income 12,000 less eligible costs (840+600+1200+150) = taxable profit 9,210
tax on profit 9,210 @ 20% = 1,842
less tax relief on mortgage interest 2400 @ 20% = 480
net tax payable 1,842 - 480 = 1,362

EDIT - I have not done it at Scottish rates, you can do that yourself 

you have fundamentally misunderstood the capital repayment!
You borrowed money to buy the property, as the loan reduces with each capital repayment, you own an increasing share of the property mortgage free, aka "equity". When you sell, the equity is yours to keep, so your personal net worth has increased. Just think about it: if your personal wealth increases why would that be a deduction against tax!. There is no way, shape, or form that a loan capital repayment is going to be a tax cost!

what you need to understand is how you finance the purchase (eg by repaying a loan) has nothing to do with the cost of the business. It is simply money borrowed and repaid. (The interest charged on the loan is different - see next point...)

you have also fundamentally misunderstood the mortgage interest tax relief. You have done exactly what the rules have stopped, you cannot claim the interest payment as a deduction when working out your profit. That is precisely what is not allowed as doing it that way gave people tax relief at their marginal rate. Instead you do as I show above: tax credit knocked off the tax bill as explained in the guidance... https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies


if you intend to DIY, and not pay an accountant who already knows what they are doing, then you need to learn the Property Income Manual so you too know what you are doing
https://www.gov.uk/hmrc-internal-manuals/property-income-manual

I also suggest you start with the simple stuff here: http://www.hmrc.gov.uk/courses/syob3/new_letting/HTML/new_letting_menu.html

and the really simple stuff
https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income

First of all, I want to say thank you so much for your detailed reply! I really do appreciate it!

I see! So the only place I was wrong was that the mortgage repayments (capital and interest) are no tax deductible in any way. I can see I made a huge mistake there by obtaining the tax credit, AND deducting it - thanks for setting me straight.

It seems fairly straightforward thus far. I'll most definitely read through the links you posted.

Thank you!

Dazed_and_C0nfused

vincent.lee said:

oldbikebloke said:

no it is not correct, because "all outgoings" includes costs that are not tax deductible 
correct answer:
income 12,000 less eligible costs (840+600+1200+150) = taxable profit 9,210
tax on profit 9,210 @ 20% = 1,842
less tax relief on mortgage interest 2400 @ 20% = 480
net tax payable 1,842 - 480 = 1,362

EDIT - I have not done it at Scottish rates, you can do that yourself 

you have fundamentally misunderstood the capital repayment!
You borrowed money to buy the property, as the loan reduces with each capital repayment, you own an increasing share of the property mortgage free, aka "equity". When you sell, the equity is yours to keep, so your personal net worth has increased. Just think about it: if your personal wealth increases why would that be a deduction against tax!. There is no way, shape, or form that a loan capital repayment is going to be a tax cost!

what you need to understand is how you finance the purchase (eg by repaying a loan) has nothing to do with the cost of the business. It is simply money borrowed and repaid. (The interest charged on the loan is different - see next point...)

you have also fundamentally misunderstood the mortgage interest tax relief. You have done exactly what the rules have stopped, you cannot claim the interest payment as a deduction when working out your profit. That is precisely what is not allowed as doing it that way gave people tax relief at their marginal rate. Instead you do as I show above: tax credit knocked off the tax bill as explained in the guidance... https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies


if you intend to DIY, and not pay an accountant who already knows what they are doing, then you need to learn the Property Income Manual so you too know what you are doing
https://www.gov.uk/hmrc-internal-manuals/property-income-manual

I also suggest you start with the simple stuff here: http://www.hmrc.gov.uk/courses/syob3/new_letting/HTML/new_letting_menu.html

and the really simple stuff
https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income

First of all, I want to say thank you so much for your detailed reply! I really do appreciate it!

I see! So the only place I was wrong was that the mortgage repayments (capital and interest) are no tax deductible in any way. I can see I made a huge mistake there by obtaining the tax credit, AND deducting it - thanks for setting me straight.

It seems fairly straightforward thus far. I'll most definitely read through the links you posted.

Thank you!

One thing worth remembering is that the tax credit is only allowable against the tax due on your rental profit.

So if you had some vacant letting periods and the tax due was only say £200 then you can only have a tax credit of £200 in that tax year, not £480.

vincent.lee

Dazed_and_C0nfused said:

vincent.lee said:

oldbikebloke said:

no it is not correct, because "all outgoings" includes costs that are not tax deductible 
correct answer:
income 12,000 less eligible costs (840+600+1200+150) = taxable profit 9,210
tax on profit 9,210 @ 20% = 1,842
less tax relief on mortgage interest 2400 @ 20% = 480
net tax payable 1,842 - 480 = 1,362

EDIT - I have not done it at Scottish rates, you can do that yourself 

you have fundamentally misunderstood the capital repayment!
You borrowed money to buy the property, as the loan reduces with each capital repayment, you own an increasing share of the property mortgage free, aka "equity". When you sell, the equity is yours to keep, so your personal net worth has increased. Just think about it: if your personal wealth increases why would that be a deduction against tax!. There is no way, shape, or form that a loan capital repayment is going to be a tax cost!

what you need to understand is how you finance the purchase (eg by repaying a loan) has nothing to do with the cost of the business. It is simply money borrowed and repaid. (The interest charged on the loan is different - see next point...)

you have also fundamentally misunderstood the mortgage interest tax relief. You have done exactly what the rules have stopped, you cannot claim the interest payment as a deduction when working out your profit. That is precisely what is not allowed as doing it that way gave people tax relief at their marginal rate. Instead you do as I show above: tax credit knocked off the tax bill as explained in the guidance... https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies


if you intend to DIY, and not pay an accountant who already knows what they are doing, then you need to learn the Property Income Manual so you too know what you are doing
https://www.gov.uk/hmrc-internal-manuals/property-income-manual

I also suggest you start with the simple stuff here: http://www.hmrc.gov.uk/courses/syob3/new_letting/HTML/new_letting_menu.html

and the really simple stuff
https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income

First of all, I want to say thank you so much for your detailed reply! I really do appreciate it!

I see! So the only place I was wrong was that the mortgage repayments (capital and interest) are no tax deductible in any way. I can see I made a huge mistake there by obtaining the tax credit, AND deducting it - thanks for setting me straight.

It seems fairly straightforward thus far. I'll most definitely read through the links you posted.

Thank you!

One thing worth remembering is that the tax credit is only allowable against the tax due on your rental profit.

So if you had some vacant letting periods and the tax due was only say £200 then you can only have a tax credit of £200 in that tax year, not £480.

Oh! I see. So it isn't just a payment to you - gotcha.

That should be okay. On the actual figures, it looks like I'll owe about £1007.40 in tax, and have tax credit of £271.20, so it just be taken off the tax.

Is it done automatically, or do I need to apply separately for tax credit?

Dazed_and_C0nfused

vincent.lee said:

Dazed_and_C0nfused said:

vincent.lee said:

oldbikebloke said:

no it is not correct, because "all outgoings" includes costs that are not tax deductible 
correct answer:
income 12,000 less eligible costs (840+600+1200+150) = taxable profit 9,210
tax on profit 9,210 @ 20% = 1,842
less tax relief on mortgage interest 2400 @ 20% = 480
net tax payable 1,842 - 480 = 1,362

EDIT - I have not done it at Scottish rates, you can do that yourself 

you have fundamentally misunderstood the capital repayment!
You borrowed money to buy the property, as the loan reduces with each capital repayment, you own an increasing share of the property mortgage free, aka "equity". When you sell, the equity is yours to keep, so your personal net worth has increased. Just think about it: if your personal wealth increases why would that be a deduction against tax!. There is no way, shape, or form that a loan capital repayment is going to be a tax cost!

what you need to understand is how you finance the purchase (eg by repaying a loan) has nothing to do with the cost of the business. It is simply money borrowed and repaid. (The interest charged on the loan is different - see next point...)

you have also fundamentally misunderstood the mortgage interest tax relief. You have done exactly what the rules have stopped, you cannot claim the interest payment as a deduction when working out your profit. That is precisely what is not allowed as doing it that way gave people tax relief at their marginal rate. Instead you do as I show above: tax credit knocked off the tax bill as explained in the guidance... https://www.gov.uk/guidance/changes-to-tax-relief-for-residential-landlords-how-its-worked-out-including-case-studies


if you intend to DIY, and not pay an accountant who already knows what they are doing, then you need to learn the Property Income Manual so you too know what you are doing
https://www.gov.uk/hmrc-internal-manuals/property-income-manual

I also suggest you start with the simple stuff here: http://www.hmrc.gov.uk/courses/syob3/new_letting/HTML/new_letting_menu.html

and the really simple stuff
https://www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-working-out-your-rental-income

First of all, I want to say thank you so much for your detailed reply! I really do appreciate it!

I see! So the only place I was wrong was that the mortgage repayments (capital and interest) are no tax deductible in any way. I can see I made a huge mistake there by obtaining the tax credit, AND deducting it - thanks for setting me straight.

It seems fairly straightforward thus far. I'll most definitely read through the links you posted.

Thank you!

One thing worth remembering is that the tax credit is only allowable against the tax due on your rental profit.

So if you had some vacant letting periods and the tax due was only say £200 then you can only have a tax credit of £200 in that tax year, not £480.

Oh! I see. So it isn't just a payment to you - gotcha.

That should be okay. On the actual figures, it looks like I'll owe about £1007.40 in tax, and have tax credit of £271.20, so it just be taken off the tax.

Is it done automatically, or do I need to apply separately for tax credit?

If you complete your return correctly then it will automatically form part of your Self Assessment tax calculation (SA302).

It may be useful for you to look at the paper versions of the 2019:20 Self Assessment return available on gov.uk, in particular the Income from Property pages and accompanying notes.

pramsay13

Are you really going to get £1000 per month on a one bedroom flat?

El_Torro

Grumpy_chap said:

I am not going to comment on the tax, but why is the LL insurance £800 per year?  That seems very expensive and worth obtaining competitive quotes.  The OP may have chosen a very high level of cover, which is their choice and may give peace-of-mind, but still worth checking the estimate is correct.

This jumped out at me as well. Even with rental income protection I would expect to pay half that figure or less for Landlord’s insurance on a 1 bedroom flat.