Updating post from Reddit.
Pretty much what the title says
I'll have a go.
How much is your mortgage? How much are your utility bills (0 if the tenant is paying)? How much is your council tax (0 if the tenant is paying)? Any other bills or expenses? E.g. one off costs like replacing the carpet?
Add all of these up. Call this figure "a".
These are your "expenses." You want these low!
How much is your tenant paying?
This is figure "b".
What is the difference between figure b and a?
Thus is your profit (if above zero) or loss ( if below zero).
Don't forget loss of interest on the capital. Otherwise you end up with ridiculous calculations which tell you that someone with a 5% mortgage is making 1000% annual profit - but someone within 95% mortgage is making a 300% loss.
Rental income less non-capital rental expenses.
I like your reply.
Mine is a bit more wordy because I'm imagining explaining it to an actual 5 year old!
Don’t forget income tax, people often overlook its impact and how many BTLs end up loss making as a result.
Main risk area is if you own in your personal name but have a mortgage, as most of it isn’t an allowed expense. You can only claim in simple terms 20% of the interest element of the mortgage as a tax credit against income tax. If you’re not careful with the figures it’s easy to make a serious loss.
You might be better off if you have finance if you have a company, but you’ll pay 19% corporation tax plus 39.95% dividend tax if you’re an additional rate tax payer. A bit of a simplification but ultimately that’s about a 51% effective rate overall. Might as well just consider the government the majority owner at that point.
Total rent minus costs = profit. Rent = monthly payment x12. Costs = insurance agents fees, repairs, expenses, possible utility bills when untenanted, mortgage repayments if relevant. Either employ An accountant or register to complete an online tax return and that will work everything out for you automatically. Keep a track during the year on a spreadsheet and then when it comes to tax return time you’ve done most of the hard work.
Add up all your rent received
Take away: Repairs (like for like replacement) Maintenance Utilities paid by you and not reimbursed Council tax paid by you and not reimbursed Services charge / ground rent Other incidental costs that are “wholly and exclusively” for renting the property (i.e if you did not incur them, you could not rent the property out safely / reliably / profitably and there is no element of private use)
The difference is your profit that is subject to income tax.
Notes:
Keep a note of the INTEREST you pay on your mortgage. This is not an expense for tax purposes if the loan is for a residential property, you will instead get a tax credit = mortgage interest x 20%. This can be capped to the level of your rental profit if that is less than the interest paid, any excess interest is carried forward.
Costs that change the state / nature / structure (example: building an extension) of the property are called capital and are not allowable expenses for income tax. You deduct later when the property is sold for capital gains tax purposes.
Have a read of HMRC’s guidance. It is fairly good. So is the low income tax reform group’s guidance.
Ignore “Dave down the pub” tax advice and speak to a professional (a qualified regulated one!) if your situation becomes more complex.
If you are chatting about taxes then the whole rental income needs putting down then you can work on tax deductions
The tax return online calls it ‘rental profit’ when it means ‘rental gross’. It’s bizarre.
Yeah just making sure they squeeze every penny out of landlords
Income less costs.
Add up all our costs for the period, that aren't "long term assets" (ie buying the building in this case), and everything else goes through the profit calc.
For the sake of ease of self assessment, it's probably worth putting any transaction costs through your profit figure and using cash basis rather than accrual basis.
Rent- expense - whatever tax you have to pay
It just means how much money added in my pocket