Help! Tax Relief on Repairs/Maintenance (Rental)?

aaryal

Hi All,

I'm sure it's probably a basic question but I can't find the answer easily.

I have a rather large repair bill coming up on my rental property. I know repairs are fully tax deductible, but what does that actually mean? Will my tax owed reduce by the full repair bill?

Example: 
Rental income = 10,000 per year.
Tax bracket: let's suppose I am in the 40% bracket
Repair of house = 3,000.

So is the tax owed: 
(40% of 10,000) MINUS 3,000 = 1,000

Or is the tax owed:
40% of (10,000 MINUS 3,000) = 2,800

Vastly different depending on how the calculation is done.

All I really want to know is, if I have to foot up a massive £3K repair bill, will that all be saved back through tax deduction of the same amount? I don't mind paying even 5K as long as I know I'm getting the 5K back.

Maybe I've got both calcs wrong. Please help me understand thank you

tacpot12

In your example you will owe £2,800 in tax. Allowable Expenses decrease the profit of your property rental business and it is the profit that you pay tax on.

The only sort of repairs and maintenance that aren't an allowable expenses are those that are improving the property's intrinsic value, such as building an extension, adding a garage or converting an attic to be a new room. Such expenses aren't really repair or maintenance. 

aaryal

Got it thank you.

Then there's something called the allowable finance expenses which is tax reduction from 20% of the lessor of one of the following 3:
1) Mortgage interest payment
2) Rential income - repairs (the one you suggested is the one)
3) adjusted total income

If my mortgage interest payment is tiny, then will that mean i effectively get no rebate on the repair because they're going to only take 20% of a tiny amount? That means I could spend loads on a repair but if (1) above is less than (2) then I'm basically getting no tax relief right?

Am I thinking about this correctly? I just want to make sure I don't spend 3K on a massive repair and basically get no tax relief...? Just want my money back in some way or another. 

caprikid1

"So is the tax owed: 
(40% of 10,000) MINUS 3,000 = 1,000"

Would be nice !, Tenants would live in lovely house (-;

uknick

aaryal said:

Got it thank you.

Then there's something called the allowable finance expenses which is tax reduction from 20% of the lessor of one of the following 3:
1) Mortgage interest payment
2) Rential income - repairs (the one you suggested is the one)
3) adjusted total income

If my mortgage interest payment is tiny, then will that mean i effectively get no rebate on the repair because they're going to only take 20% of a tiny amount? That means I could spend loads on a repair but if (1) above is less than (2) then I'm basically getting no tax relief right?

Am I thinking about this correctly? I just want to make sure I don't spend 3K on a massive repair and basically get no tax relief...? Just want my money back in some way or another. 

Not really sure what you saying here.  As far as I know, the 20% tax relief limit relates to mortgage interest costs being restricted to 20% so higher rate taxpayers lose out.

I'm not aware of any calculation which limits legitimate repair expenditure.  If that was the case, somebody with no mortgage would never get any tax relief on repairs and other running costs of the BTL. 

[Deleted User]

aaryal said:

Got it thank you.

Then there's something called the allowable finance expenses which is tax reduction from 20% of the lessor of one of the following 3:
1) Mortgage interest payment
2) Rential income - repairs (the one you suggested is the one)
3) adjusted total income

If my mortgage interest payment is tiny, then will that mean i effectively get no rebate on the repair because they're going to only take 20% of a tiny amount? That means I could spend loads on a repair but if (1) above is less than (2) then I'm basically getting no tax relief right?

Am I thinking about this correctly? I just want to make sure I don't spend 3K on a massive repair and basically get no tax relief...? Just want my money back in some way or another. 

Mortgage interest is given as a tax credit. Let’s say the interest is £1000 - you will get a £200 credit against your tax but ONLY IF you have a tax liability of at least that amount. 

In other words the mortgage interest alone cannot create a refund. 

Jeremy535897

aaryal said:

Got it thank you.

Then there's something called the allowable finance expenses which is tax reduction from 20% of the lessor of one of the following 3:
1) Mortgage interest payment
2) Rential income - repairs (the one you suggested is the one)
3) adjusted total income

If my mortgage interest payment is tiny, then will that mean i effectively get no rebate on the repair because they're going to only take 20% of a tiny amount? That means I could spend loads on a repair but if (1) above is less than (2) then I'm basically getting no tax relief right?

Am I thinking about this correctly? I just want to make sure I don't spend 3K on a massive repair and basically get no tax relief...? Just want my money back in some way or another. 

No. Let's say you have rent £10,000 less repair £3,000, net assessable £7,000. Tax at 40% is £2,800. Then you can deduct mortgage interest finance cost at 20% of the lowest of:
1) Mortgage interest paid 
2) £7,000 
3) Adjusted total income (will be much higher than 1) or 2) if you pay higher rate tax)

If you paid mortgage interest of £5,000, therefore, you could deduct £1,000 from your tax bill. if you paid £10,000 mortgage interest, you could deduct £1,400 and carry £600 forward. You never lose the relief for the £3,000 repairs.

aaryal

Jeremy535897 said:

aaryal said:

Got it thank you.

Then there's something called the allowable finance expenses which is tax reduction from 20% of the lessor of one of the following 3:
1) Mortgage interest payment
2) Rential income - repairs (the one you suggested is the one)
3) adjusted total income

If my mortgage interest payment is tiny, then will that mean i effectively get no rebate on the repair because they're going to only take 20% of a tiny amount? That means I could spend loads on a repair but if (1) above is less than (2) then I'm basically getting no tax relief right?

Am I thinking about this correctly? I just want to make sure I don't spend 3K on a massive repair and basically get no tax relief...? Just want my money back in some way or another. 

No. Let's say you have rent £10,000 less repair £3,000, net assessable £7,000. Tax at 40% is £2,800. Then you can deduct mortgage interest finance cost at 20% of the lowest of:
1) Mortgage interest paid 
2) £7,000 
3) Adjusted total income (will be much higher than 1) or 2) if you pay higher rate tax)

If you paid mortgage interest of £5,000, therefore, you could deduct £1,000 from your tax bill. if you paid £10,000 mortgage interest, you could deduct £1,400 and carry £600 forward. You never lose the relief for the £3,000 repairs.

Ok I think I got it! Very useful example above

QUESTION 1
So using that example above:
Step 1: Rent: 10k, Repair: 3k, Net accessible: 7k, taxed at 40% = I owe £2,800 in Tax.
Step 2: Then deduct mortgage interest finance at 20%: using your example (1) at 20% is 1k deduction.
So my final owed tax = 2,800 - 1,000 = 1,800 correct?

QUESTION 2
On your other example where mortgage interest = 10k --> that implies lowest is now (2) = 7K. 20% of 7K = deduct 1.4K. Where does the 600 carry forward come from though?

QUESTION 3
What happens if I make a loss on rental income e.g. rental income is 10K, repair 12K = -2K. In that case what happens to the maths? Is my tax owed just ZERO? Or does the taxman give me a rebate of 40% of -2K = 800 refund?

And then what happens to the step 2 whereby 1) is 5K mortgage interest, 2) is -800, 3 is way higer. In this case the lowest is -800. So do I get another 160 rebated?

QUESTION 4
And final quesiton. Is there an easy "mental maths" to help work this all out. So if I spend 3k on repair, is there an easy mental way to figure out "ok i'm gonna get this much back". 

If I spend 7K (extreme example) on a huge repair then what's the easiest way to figure out roughly how much of that 7K i get back without having to do the complex maths above?

Thanks again mate.

sheramber

You donlt get money back. You pay less tax.

Assuming you are due to pay tax on 10, 000 profit you would pay £4000 tax

  On 7000 profit you would pay  £2800 tax

 So your 3000 expenses gives tax relief of £1200.   

40% x 3000 _=1200  

[Deleted User]

Question 1 - Correct

Question 2 - 20% of £10000 is £2000. £1400 used, £600 carried forward. 

Question 3. The taxman will not refund anything! Loss carried forward to following year - £2000

Question 4 - £7000 repairs reduces your profit by £7000. Providing there IS still a profit your tax reduces by 40% of £7000.

aaryal

sheramber said:

You donlt get money back. You pay less tax.

Assuming you are due to pay tax on 10, 000 profit you would pay £4000 tax

  On 7000 profit you would pay  £2800 tax

 So your 3000 expenses gives tax relief of £1200.   

40% x 3000 _=1200  

Thanks. What happens if expenses is more than the rental income. 10k income. 12k expense = 2k loss. What happens in this scenario?