How is a mortgage overpayment accounted for?

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

    How is a mortgage overpayment accounted for?

    Hi all,

    I own a buy to let property that is registered in a limited company and I would like to set up a regular overpayment each month to reduce the balance of the mortgage.

    When it comes to submitting the annual accounts, how would this overpayment be accounted for?

    As I am effectively using the profits of the rental income to do this, Would it be seen as a dividend / repayment of director loan?

    Many thanks



    #2
    Do you mean the company makes the payment to the lender or that you, human, pay it?

    Presumably the mortgage has company named as borrower?
    I am legally unqualified: If you need to rely on advice check it with a suitable authority - eg a solicitor specialising in landlord/tenant law...

    Comment


      #3
      Use of the word "mortgage" implies that the loan is from a third-party lender. Reference to dividend or Director loan suggests that you are the lender via a Director loan.

      Can you clarify where the funds have been borrowed from and on what terms?
      There is a fine line between irony and stupidity. If I say something absurd please assume that I am being facetious.

      Comment


        #4
        First of all, you need to check that the lender allows monthly overpayments, because many don't.

        Assuming you're maintaining profit and loss accounts (so ignoring any balance sheet effects) the overpayments are simply a cost to the business, just as the interest on the mortgage is.
        As an individual there is a difference between capital and operational spend for tax purposes, but that difference is not relevant for a limited company.

        If you are also maintaining a balance sheet for the company, you would need to make a parallel adjustment to that.
        When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
        Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

        Comment


          #5
          Originally posted by theartfullodger View Post
          Do you mean the company makes the payment to the lender or that you, human, pay it?

          Presumably the mortgage has company named as borrower?
          Yes so the company would be making the payment to the lender

          Comment


            #6
            Originally posted by doobrey View Post
            Use of the word "mortgage" implies that the loan is from a third-party lender. Reference to dividend or Director loan suggests that you are the lender via a Director loan.

            Can you clarify where the funds have been borrowed from and on what terms?

            Apologies, the funds have been borrowed from a 3rd party lender (West Brom commercial to be precise).

            I have borrowed £65k on an interest only mortgage and they allow a £1,000 pcm overpayment to be made

            I mentioned dividend and director loan as this is how I have taken money out of the business previously

            Comment


              #7
              Dividends or director loans are between company and shareholders/directors, not some other entities.
              I am legally unqualified: If you need to rely on advice check it with a suitable authority - eg a solicitor specialising in landlord/tenant law...

              Comment


                #8
                Repayment of principal is taken off the company's debt. Any interest is an operating expense. None of it going to you, so dividends / Directors Loan are not applicable.
                There is a fine line between irony and stupidity. If I say something absurd please assume that I am being facetious.

                Comment


                  #9
                  The company pays dividend to the shareholder ( separate matter ) .

                  The Company pays annual interest to director who pays this money to mortgage lender.

                  The company has a director's loan which came from mortgage loan taken out by director.

                  Therefore any repayments for reducing the mortgage loan paid from company profits will mean reducing the director's loan.

                  Comment


                    #10
                    That's not how I read it. Company borrowed from a bank(?) If so it has nothing to do with a Director Loan.
                    There is a fine line between irony and stupidity. If I say something absurd please assume that I am being facetious.

                    Comment


                      #11
                      The company takes out a mortgage and buys a property.
                      It has an asset worth £x and a liability equal to the mortgage - neither of those a P&L issues, they affect the balance sheet.

                      Any money paid for the property that is not the loan is a P&L business cost (if it's funded by a director's loan, that's treated in the same way as the mortgage i.e. it's a balance sheet liability).

                      Rent is received, which is income (a P&L event that doesn't affect the balance sheet).
                      The company pays the interest to the lender, which is a normal business expense which reduces profit (again P&L).
                      The company pays down some of the loan, from its income, that's a business expense (P&L) that reduces the balance sheet liability and doesn't affect the asset value.
                      The same process for the director's loan, assuming there is one.

                      Eventually the mortgage is paid off, the liability is zero and the balance sheet reflects that.
                      The profit of the company has been reduced by the series of payments (and is taxed accordingly).

                      When the property is sold, the income from the sale is profit and the asset value on the balance sheet is reduced to zero.
                      The company pays corporation tax on the income from the sale.
                      When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                      Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                      Comment


                        #12
                        Thanks for the explanation.
                        Please excuse my ignorance on this topic, Im a little curious towards a comment you made about P&L…

                        “The company pays down some of the loan from its income that is a business expense (P&L)”

                        Now, the company in question makes £400 per month net profit from the rental of a property after all fees are deducted and I was planning on spending the entirety of this profit on reducing the loan amount with the mortgage lender (£400 overpayment each month).

                        If I did this, would I therefore make zero profit each month and ultimately have no corporation tax or dividend available on my rental income?

                        Comment


                          #13
                          Yes, that's right.
                          You'd have a whole chunk of profit when you sell the property with all of its equity available, and that would be taxable.
                          When I post, I am expressing an opinion - feel free to disagree, I have been wrong before.
                          Please don't act on my suggestions without checking with a grown-up (ideally some kind of expert).

                          Comment


                            #14
                            jpkeates,

                            Thanks for your help 👍

                            Comment


                              #15
                              Originally posted by nick_noal View Post
                              Thanks for the explanation.
                              Please excuse my ignorance on this topic, Im a little curious towards a comment you made about P&L…

                              “The company pays down some of the loan from its income that is a business expense (P&L)”

                              Now, the company in question makes £400 per month net profit from the rental of a property after all fees are deducted and I was planning on spending the entirety of this profit on reducing the loan amount with the mortgage lender (£400 overpayment each month).

                              If I did this, would I therefore make zero profit each month and ultimately have no corporation tax or dividend available on my rental income?
                              The net profit of £400 = £4800 per year which is subject to corporation tax at 19%. = £912.

                              So reduction of mortgage loan for first year will be £3888

                              Comment

                              Latest Activity

                              Collapse

                              • Reply to Will they raise taxes again?
                                by Gordon999
                                Corporation tax for large companies ( over £250K profit ) will be raised from 19% to 25% rate commencing from April 2023.
                                30-11-2021, 21:35 PM
                              • Will they raise taxes again?
                                by JK0
                                My accountant just finished my 2020/21 tax return, and my income is half of the previous year. I did not think it would be quite that bad. (Half my tenants moved out, and I had a job to replace them. Plus had to get fourteen EICR's!)

                                I'm guessing you guys are in a similar boat. Never mind...
                                27-11-2021, 20:20 PM
                              • Reply to Corporation Tax
                                by Gordon999
                                There seems to be 2 problems ( I am not an accountant ) :

                                (1.) The company has to pay £30,000 tax due to revaluation of property asset increased higher by £150,000 ( estimated). Does it have the cash in its bank account to pay ?

                                ( 2) husband owns one third interest of property...
                                30-11-2021, 14:09 PM
                              • Reply to Will they raise taxes again?
                                by theartfullodger
                                Taxes bound to go up, huge amounts to pay for Covid & BR*X*it. Death & taxes, death & taxes.

                                Holding off working out my position, wishing to remain cheerful for Christmas.

                                Best wishes to all...
                                28-11-2021, 10:45 AM
                              • Reply to Will they raise taxes again?
                                by Neelix
                                ^^ please don’t take this the wrong way but £10 k down on what turnover or number of properties?

                                i’ve done a lot of EICRs and remedial work over the last 18 months and a lot of it was because properties hadn’t been inspected and some were just dangerous....
                                28-11-2021, 10:29 AM
                              • Reply to Will they raise taxes again?
                                by jpkeates
                                I'm about £10k down and it's mostly electrical work.

                                I can't see this government putting up taxes anymore before the next election, although there's nothing to say that they won't figure out how to tax landlords more specifically - there's few votes lost there.

                                My candidate...
                                28-11-2021, 10:07 AM
                              • Reply to Will they raise taxes again?
                                by Neelix
                                That's a lots of unsatisfactory EICR's and remedial work - so not annual costs!...
                                28-11-2021, 09:00 AM
                              • Reply to Will they raise taxes again?
                                by Neelix
                                Wow.

                                So that must be lots of unsatisfactory reports and lots of remedial work.

                                so not annual Costa...
                                28-11-2021, 08:31 AM
                              • Reply to Will they raise taxes again?
                                by jpucng62
                                Clearly you were a bit behind on your electrical work!...
                                28-11-2021, 06:58 AM
                              • Reply to Will they raise taxes again?
                                by JK0
                                The EICR's cost around £12k in total....
                                27-11-2021, 22:48 PM
                              Working...
                              X