Tax Return ye2018 checking Finance costs?

by Readers Question

9:22 AM, 20th December 2018
About 2 years ago

Tax Return ye2018 checking Finance costs?

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Tax Return ye2018 checking Finance costs?

I’m very confused with Section 24 Tenant tax. Please can someone clarify the simple profit calculation for a Buy To Let for YE2018

Rents received £30,000

Repairs & renewals £10,000

Mortgage Interest £10,000

So to the Layman the Profit is therefore £10,000 meaning tax at 20% i.e. £2,000 is due.

But what should the calculation be due to the tax changes.

Many thanks

StevieG


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Comments

Neil Patterson

9:32 AM, 20th December 2018
About 2 years ago

Hi Steve,
You should not accept tax advice in isolation of all the facts ie other income, allowances, losses and who owns the property etc.

Therefore in isolation as long as all the rental income gross does not push you into the high rate tax bracket then you can offset mortgage interest at the 20% tax rate.

If the rental income pushes you past the high rate tax threshold then the calculation is more complex and you can only use a portion of the mortgage interest.

You also need to make sure what you consider repairs and renewals is not considered a capital expense by HMRC.

If you have additional factors to what you have stated or your tax return is in any way complex please consider using a qualified accountant that preferrably specialises in property.

Please also see our tax planning page for landlords >> https://www.property118.com/tax/

H B

11:05 AM, 20th December 2018
About 2 years ago

As Neil states this is not meaningful outside your other income (I doubt you survive on an annual income of only £8000 net) and ensuring that you have the deductibles correct.

But if your other income puts your income over the 40% tax bracket, your tax above will be 40% of £15,000 ie £6000.

Old Mrs Landlord

13:25 PM, 20th December 2018
About 2 years ago

Stevie, by yr 2018 do you mean tax for the year from April 2018 or are you referring to the tax on rental income from April 2017 to April 2018, i.e. the tax which must be paid by next month's deadline? (Regardless of which of these years you are asking about, the commentators above are right to point out that the tax cannot be calculated on the rental income alone, as the amount of each individual's income from other sources impinges on the calculation, meaning the tax figure will vary widely between individuals with identical rental income.)

Mark Alexander

19:56 PM, 20th December 2018
About 2 years ago

Reply to the comment left by H B at 20/12/2018 - 11:05
Your calculation is wrong.

First, the restriction in 2017/18 only applies to 25% of finance costs. You have assumed 50%.

Second, you forgot to mention the 20% tax credit on the disallowed finance costs.

Old Mrs Landlord

22:10 PM, 20th December 2018
About 2 years ago

Reply to the comment left by Mark Alexander at 20/12/2018 - 19:56Yes Mark,that's what prompted me to attempt to elicit first of all which actual tax year he is enquiring about so that we know whether the restriction on finance costs will be 25% or 50%. Stating merely "Year 2018" is ambiguous and the period in question needs to be clarified before any calculation can be made.

Seething Landlord

11:05 AM, 21st December 2018
About 2 years ago

The title of the question says year ending 2018 so refers to the 2017 to 2018 tax return which is due by the end of January 2019. I have not yet completed my return but understand from the forms that I have looked at that in the box where you enter your finance costs the notes tell you to enter only 75% of the full amount and there is another box in which to enter the remaining 25% (or this might be done automatically, can't quite remember). The amount that you have to pay in tax will then be calculated automatically as in previous years, taking into account the 20% of non allowable finance costs that is deducted at the end. I am assuming that you will be using the online system as otherwise you are far too late anyway.

Seething Landlord

11:15 AM, 21st December 2018
About 2 years ago

Reply to the comment left by Seething Landlord at 21/12/2018 - 11:05
PS I have assumed that "ye" means year ending.

Old Mrs Landlord

12:54 PM, 21st December 2018
About 2 years ago

Reply to the comment left by Seething Landlord at 21/12/2018 - 11:15
Oh, right - my mistake, apologies.

silversurfer2017

14:08 PM, 21st December 2018
About 2 years ago

Having already had my self assessment calculation I can tell you exactly how the tax inspector accounts for the disallowed interest. He adds the disallowed interest (25%) on to your gross income so that in Stevie's case he adds £2,500 on to his gross income. He still allows the £10,000 interest as an expense (which it is of course, but only at 20% tax relief). The next tax year he will add 50% of the interest, being £5,000 to his gross income and still allow the £10,000 interest as a business expense, again at only 20% relief. The net result of course is as follows:
For a taxpayer well within the 20% tax band there will be no difference in the amount of tax to pay.
For a tax payer right on the threshold between the 20% and 40% bands and for those tax payers well into the 40% band they will end up paying 40% tax on this disallowed interest but only getting 20% back in tax relief.

H B

15:49 PM, 22nd December 2018
About 2 years ago

Reply to the comment left by Mark Alexander at 20/12/2018 - 19:56
You're right - I was doing full impact rather than the partial one for this year. Lucky I haven't done my tax return yet!
But I did take into account the 20% relief.

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