Property income/drawings

Stan Bown

Hi there
A landlord has an empty property for six months of the year. The property has a mortgage and the landlord has to make capital contributions in order to pay the mortgage. When there is a tenant in place, the landlord takes back some of the capital he deposited to pay the mortgage. For tax purposes, must these withdrawals be classed as drawings, or can the capital and then drawings be classed as a loan to the property business and then a repayment of the loan?
Thanks for any views.
Stan

deanshepherd

Entirely up to you.

You can either ramp up both capital introduced and drawings or net them off as a temporary loan. There is no prescribed format for a rental business and it makes no difference for tax purposes.

Stan Bown

Good of you to reply. Sorry, I've got a follow up clarification question: are you saying that if the drawings match capital contribution in value, they don't have to be added back when calculating rental profit for the period? Thanks.

Bluewednesday

Capital or drawings don't appear in the profit for the period, that's why they don't have any impact on the tax position.

Are you drawing up some accounts for rental properties and doing a balance sheet?

Stan Bown

Hi, thanks for the further reply.

I'm completing the income from property calculations for an SA return.

I know that for trading income appropriations of profit are disallowed expenditure and must be added back when calculating taxable income.

Under normal circumstances I would have applied the same rule to calculating taxable property income. However, because the landlord has pumped in £4k during the year but withdrawn only £0.6k (£600), I wondered if the capital contribution could be treated as a loan and the drawings as repayment of capital, rather than appropriation of profit, when calculating taxable income.

He's making a loss, so the question is slightly academic, but it does affect the amount of loss to carry forward. There are no other properties to soak up the loss this year.

JodieR

Stan Bown wrote: »

Hi, thanks for the further reply.

I know that for trading income appropriations of profit are disallowed expenditure and must be added back when calculating taxable income.

what exactly do you mean by this?

When you're preparing the P&L for the property you declare the rental income and claim allowances for the mortgage interest and any other costs incurred, regardless of whether they were paid from a dedicated property bank account or by the landlord's personal account. If you're asking whether you can claim for mortgage interest & other costs while the property was unoccupied then yes you can. THe only time you'd need to apportion the costs is if the landlord occupied the property him/herself for part of the year.

Stan Bown

Hi Jodie

Sorry if I'm not explaining myself well.

The question is: if a landlord takes any drawings during the year, do the drawings always have to be added back when calculating the tax adjusted income from property?

JodieR

Well Dean & Blue Wednesday have answered that already - drawings were never an allowable expense to start with so it makes no difference to taxable profits.

Stan Bown

Thanks, all.

PGM

Bluewednesday wrote: »

Capital or drawings don't appear in the profit for the period, that's why they don't have any impact on the tax position.

Are you drawing up some accounts for rental properties and doing a balance sheet?

I rent a property that has a fair bit of equity in it. If I remortgaged and took say 20k out, is there any tax implications? Or can I just enjoy the 20k and charge the additional interest against profit with no issues?

T.C.

That is fine. You can remortgage and take out some equity. You can claim the interest as an expense. Just remember, when you sell, you will pay tax on the profit made on the sale cost less the purchase cost (plus expenses of course), and not the sale cost less the mortgage total. Hope that makes sense.

PGM

T.C. wrote: »

That is fine. You can remortgage and take out some equity. You can claim the interest as an expense. Just remember, when you sell, you will pay tax on the profit made on the sale cost less the purchase cost (plus expenses of course), and not the sale cost less the mortgage total. Hope that makes sense.

Thanks TC. I wonder how many rental properties suddenly become main residences again before being sold

deanshepherd

You can only claim interest if the value of the new mortgage does not now exceed the value of the property when first let.

PGM

deanshepherd wrote: »

You can only claim interest if the value of the new mortgage does not now exceed the value of the property when first let.

Thankyou, I did not know that. Although that must difficult to prove in some cases!

groundy

My understanding was that you can not claim tax relief for the interest if the additional mortgage is for personal use and not for use against the property or an additional property!

deanshepherd

The business purpose would be the refinancing of the property to return capital to the rental business owner. It does not matter what the owner then does with those funds.

Here is the guidance I generally refer to.

groundy

Sorry Dean now read your posting again and agree. Obviously any increase in value in the property can not be taken by way of mortgage and used personally.