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bigduckontax
bigduckontax, Accountant
Category: Tax
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I am in the process of buying a buy to let flat. The rental

Customer Question

I am in the process of buying a buy to let flat. The rental income will be £1000 a month.
The mortgage payment (repayment mortgage) is £875 a month along with service charge of £125.
So on the face of it the rental income will allow me to break even.
However I understand I would need to pay tax on the repayment part of my mortgage (40% taxpayer) so I could actually face a tax bill of £2k upwards even though I am not actually 'making' any money out of it?
Submitted: 1 year ago.
Category: Tax
Expert:  bigduckontax replied 1 year ago.
Hello, I am Keith, one of the experts on Just Answer, and happy to help you with your question.
You do not pay tax on the repayment part of the mortgage, you merely have to find the funds from your income after taxation. Only the interest element of the mortgage used to acquire the buy to let property would be allowable against the rental income in any event. However, this does not last for long as this year the Chancellor introduced the following changes [source; The Telegraph]:
'The tax changes, which begin in 2017, will see landlords lose a quarter of their higher-rate relief each year until 2020, when it will be restricted to 20pc on all mortgage interest.'
As a higher rate tax payer you will be directly affected by these changes.
You can find The Telegraph's article below which you may find interesting to read as it provides some ways round the situation in which you find, or will find, yourself:
http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/11751956/Buy-to-let-five-ways-landlords-can-beat-new-tax-hikes.html
I do hope that you find my response of assistance.
Customer: replied 1 year ago.
Thank you, ***** ***** my circumstance could you give a rough idea of how much tax I would have to pay, if for example the mortgage interest is £475 a month?
I am just worried about having a huge tax bill if I am only just breaking even in actual terms. Thank you.
Expert:  bigduckontax replied 1 year ago.
At present 1000 - 475 = 525 @ 40% = GBP 210 a month in tax. So you are actually making 315 a month.
As the new rules bite you will loose a quarter each year so it will be say 356 in 2017; 1000 - 356 = 644 @ 40% = 285 a month et seq until relief is only available at 20% [95 quid].
A lot of media sources say this will be the death knell of buy to let in the long term, but do read The Telegraph article.
Please be so kind as to rate me before you leave the Just Answer site.
Customer: replied 1 year ago.
Thank you, ***** ***** clarify would I need to pay 40% tax on that £315 a month?Appreciate your help!
Expert:  bigduckontax replied 1 year ago.
No, the 315 is your net profit. I would be inclined to look at that service charge as it could well be allowable against the rental in addition to the interest element and other expenses. The following can also be set against rentals [source; Which]:
'The most common types of expenses you can deduct are:
water rates, council tax, gas and electricity
maintenance and repairs to the property (but not improvements)
contents insurance
interest on a mortgage to buy the property
costs of services, including the wages of gardeners and cleaners (as part of the rental agreement)
letting agents' fees
legal fees for lets of a year or less, or for renewing a lease of less than 50 years
accountant’s fees
rents, ground rents and service charges
direct costs such as phone calls, stationery and advertising for new tenants
The expense should be incurred wholly and exclusively as a result of renting out your property.'
Hope this helps.
Customer: replied 1 year ago.
Thank you but I am still confused as I thought you have to pay tax on any profit and if that £315 a month is considered a profit would I not have to pay tax on it? Sorry for all the questions! Thank you.
Expert:  bigduckontax replied 1 year ago.
Your 1000 - 475 ie 525 is the profit upon which you will be assessed for tax, although I have indicated other items which may be deducted from this figure to reduce it further. The 315 I mentioned is merely the free cash that you will have after any tax has been applied at 40%. I hope that clears the air for you.