Updating post from Reddit.
Hi all,
Would really appreciate some input on my situation as a landlord
I want to calculate my total annual profit for the house that I am renting out.
Rental income = £18,000/year
Mortgage payments (interest only): £820/month × 12 = £9,840/year
Ground rent and service charge: £2,000/year
Total expenses: £9,840 + £2,000 = £11,840
Net Profit (Before Tax) = £18,000 - £11,840 = £6,160/yearAnnual salary 65k, hence fall into the higher rate tax band (40%) on income over £50,270.
Under current UK tax rules for Buy to Let with interest-only mortgage, I cannot deduct the mortgage interest directly from rental income. Instead, I get a 20% tax credit on the mortgage interest paid.
Taxable rental profit = £18,000 - £2,000 = £16,00
Since I'm in the 40% tax bracket, the tax on £16,000 = £6,40. But with 20% credit on mortgage interest (£9,840 × 20% = £1,968)
Final tax bill = £6,400 - £1,968 = £4,432Final profit: £1,728 per year
Is this correct calculation? Seems like such a low profit margin.
thanks for looking into this!
Yes the profit benefits for landlords have been squeezed out
Seems about right.
Yes, that seems right to me. I became an accidental landlord when I moved for work 2 years ago and with a repayment mortgage I have worked out my profit is a massive £30 a month after tax.
Admittedly, I could charge more for rent but it was a means to move quickly and I don't regret it. I will probably try to sell in the near future and pay down my residential mortgage for my current home. That and the additional dwelling supplement fees in Scotland are a killer when buying a second home.
That's not your profit because you're paying the house back on repayment though
So I guess I should use the interest portion of the mortgage only to work out the profits? Is that right? The difference is about £150 per month, so that would put monthly profits nearer £180? That does sound better!
That's so intuitive for me. You choose to take some of your renter's money to pay off a loan you have (your mortgage). That money doesn't disappear, it's obvious it's part of your profit.
Probably time to sell it! Plenty of people out there needing to get on the ladder.
This seems like awful returns, how much equity have you got in the property?
On the face of it, unless you are getting or expecting very strong capital growth then I’d be thinking about selling. A boiler replacement or other big ticket item will see you heading towards a loss.
Any thoughts on increasing your pension contributions to get yourself down to basic rate tax? (Big contribution I know) but then you are making more like £5k a year
Leasehold is terrible and you highlight why Higher Rate Taxpayers buy BTL in a LTD Company SPV.
That is right.
This is why if you want to make this profitable, you shouldn't have a mortgage.
What other expenses have you incurred? They reduce your tax liability.
there is no other expense, either way that tax liability is 70% of my profit, which is ridiculous
You sure? Letting fees, accountancy fees, mileage, building insurance, gas / elec certificates, other maintenance or repairs to name a few..
Exactly my point. Whatever, there is no helping some folk.
You may not have any other expenses right now but, in addition to mandatory requirements like an annual gas safety certificate, it’s very likely that in the next year or two there will be things to repair or replace.
Are you also an ex student so student loan as you will need to calculate the payments on the rental income too. If you are worried about the 40% tax and don't need the money maybe look at salary sacrifice to build your pension fund. Although I just saw your salary is far higher and Id guess you wouldn't want to sacrifice the entire amount. Probably earn more on a global fund over many years and no hassle with that sort of investment.
How have you not had any maintenance, accountancy, or regulatory expenses? Something is wrong with your calculations.
Actual profit is lower because you didn’t include:
.
To make profit you should:
Can you fully deduct interest in a LTD? Really?
Of course
I fear that Reeves will get her claws into Ltd companies next.
Would be easy to restrict interest allowance or charge the main rate of corporation tax on all profits.
At the moment it's the only way that makes sense though.
They’re unlikely to be able to change finance costs to ‘profit’ for public companies, pensive funds etc. It would cause too much economic damage.
The original changes were a little sneaky that they only targeted ‘amateurs’. The pros wield more political power.
When we last had small company CT rates and main rates for larger companies, all small investment companies were taxed at the main or large company rate.
That at least must be under consideration.
Welcome to the UK