Hi
this is not so much a sage question as an accounting question - consider what it is you are trying to do, then consider the double entry.

Are you now introducing further capital to the business?

Then using it to repay some creditors?

Once you have got to that then you can key it in sage.

Im not trying to be awkward - its just to get you to think about it a bit more.

There are no expenses in the list above.

If you have to incur repairs before the property is fit for habitation then that is capital expenditure, not an expense (Law Shipping Co Ltd v CIR (1923)).

For any actual expenses (not the pre occupation renovations) loaning the company money will not hit the expense account directly. It's Cr Capital introduced, Dr Bank. The expenses are then paid from the bank and recorded as incurred.

If you pay the expenses personally then it would be Cr Capital introduced, Dr expense account

For the Capital account, if you areincorporated that will be the DLA and if you are a sole trader that will be owner capital introduced.

I'm figuring that we're running the site as a relay team Jo.... Batton back to you again ;)

Thanks for your responses, I rarely use Journals, I was using this as an easy way to show my thoughts, but I should have used "Cr" and "Dr" to avoid confusion.

So to summarise, whether money loaned is to be used as Capital or Expenses it's always Cr Capital introduced, Dr Bank ?

Thanks for clarifying.

This leads on to my ultimate question;

Trying to keep this simple, figures are fictitious, it's for clarification only. It's a partnership of my wife and I.

My loan for renovations of £7k I can charge interest on this?
I have no other costs (I wish)
My Rental income is £7k in the same tax year.
So income £7k - Expenses £7k = no profit, hence no tax liability.

In year 2 I can no longer claim interest on this loan as I have personally received £7k income which I should have used to pay this off.
Or can the loan remain as a positive balance in the bank so I can still charge interest?

Thanks
Michael

To add to what Joanne said I just want to put it in a bit on context as you may be thinking "but my mate down the pub said that his accountant told him to claim interest". The issue comes down to legal form. If your business was a limited company it is a seperate legal entity and interest can be charged. If you are a sole trader then you and the business are one and the same so no interest can be charged (it would simply annul itself).

In addition to that I note that you picked £7k again which may just be coincidence. But, if you are still referring back to the earlier amount as expenses, it isn't, it's capital expenditure so doesn't touch the P&L (balance sheet movements only).

The sitiuation is. You have loaned the business £7k on which no interest is payable and the money remains owing to you until one way or another it is repaid to you (it doesn't simpy disappear based on income vs expenditure but it does lose itself in the capital account).

You pay tax based upon the profits (real profits, not paper ones). The profit is added to a seperate bucket in the capital account. You draw your money against the capital account

As an example of your capital account it is likely to be something like

Balance at start of period £1000
Capital Introduced £7000
Net Profit £5000
Drawings (£4000)

The above would result in a following period Balance at start of period (which is the same as owner capital) of £9000.

Of the above you will only pay tax on the Net Profit figure for the year so in the above £5000 (depreciation adjusted back in pre capital allowances calculations) is the taxable amount.

Lets look at the following year where no further capital is introduced.

Balance at start of period £9000
Capital Introduced £0
Net Profit £3000
Drawings (£8000)

Now in this instance I've shown already how the £9k was derived. Profit in this year is lower and the Drawing are higher than Profit so this siituation is going to eat into £5k of the £9k capital.

The amount taxed (after depreciation adjustment) would be the £3k figure as the profit apportionment of the £9k has been taxed previously and the remainder of the £9k is owner capital which would not be taxed.

Are you seeing how it all fits into place and takes care of itself. Can you see how the loan disappears into the capital account but it doesn't matter as you will never pay tax on that.

Note that a loan taken out on commercial terms from a genuine lender is treated completely differently to an owners personal capital injection into the business.

The real key that you are looking for is what are legitimate expense that would reduce your profit and hence your tax bill. With houses you need to be careful as you will find many items that you expect to be Expensed are capital and also some itmes that are capital have no associated capital allowances.

Always remember that the profit on the P&L is a paper profit. That is not the profit that you are taxed on as, at a minimum, any depreciation (which is an accounting concept) needs to be added back to the profit figure and then capital allowances applied and its worth noting that capital allowances are not available on structrures.

Hope that makes latters clearer for you.

kind regards,

Shaun.

p.s. Joanne makes a very good point that having a professional involved would save you from making a potentially costly mistake based upon assumptions, misunderstandings and hearsay.

Shaun

Firstly thanks for taking to time to write a detailed response, this has been really insightful.

Thanks for clarifying the difference on loans for limited companies and partnerships, this now makes sense.

I used £7k for consistency, its just a random figure. I get your point on Capital/Expenses, I've allocated these correctly. I was merely trying to simplify things, but I fear in my effort this was not the case, apologies.

So here's what really happened, I needed £10k to complete renovation work. Easiest and cheapest way was to reMortgage main residence. This is what I done;

Cr 1200 Bank - Dr 2330 Mortgages

Every month I allocate 2.39% (that being the mortgage rate) as follows;

Cr 1251 My Expense Account - Dr 7903 Mortgage Interest Paid

So reading what you have put I think this is okay?


Where I think I confused things is I am claiming 2.39% on my expenses, but using this to pay private mortgage. As you say this annuls itself. And you have clarified as a partnership the company and I are the same thing. Where as I was seeing myself as a middleman, I borrow from Bank and lend to company which is not correct. I think I've got it, but please say if I am still missing something.

Thanks
Michael

edited

-- Edited by Cheshire on Sunday 24th of January 2016 08:29:20 PM

Cheshire wrote:

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I will send you my bill. Shaun's of course will be higher for his invaluable advice.

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I don't know Jo, people don't generally like the advice that I give (#1) so I'd best not start charging for it

I think that my clients just pay me to go away... Hey, if a system works don't knock it!

 

 

#1 I figure that our main job is keeping our clients free of penalties, interest, surcharges, disqualification and jail time rather than telling them what they want to hear.

-- Edited by Shamus on Sunday 24th of January 2016 10:48:34 PM

Shamus wrote:

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I just want to clarify that I did not suggest that the situation that you describe over expensing interest was ok.

Rather than repeat debates that have been had many times over on Aweb I will direct you to an excellent thread over there that you should read to get an understanding for the intricacies of the tax situation and especially the effect of mortgaging the wrong property

www.accountingweb.co.uk/article/any-answers-answered-mortgage-interest-relief/529040

Which links to :

www.accountingweb.co.uk/anyanswers/question/tax-let-property

Both threads include a good number of tax experts and as you will see, the interest being an allowable expense the way that your loan has been raised is not so cut and dried.

I would take whatever you read on Aweb above anything that you may have been told by other buy to let landlords.

Sorry that this is a pointer rather than an answer.

Shaun.

p.s. for all responses on site see disclaimer in signature.

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Shaun

 

Thanks for the links, they were more about being able to claim interest up to 100% of  portfolio when first let which I am ofay with. But it did also lead me onto BIM45700 which was a good read.

Thanks

Michael