Summer Budget 2015 – Landlords Reactions

Reply to the comment left by “Puzzler ” at “09/07/2015 – 19:16“:

Hi Puzzler,

I can see the posts on this site…and I agree, it’s brilliant, I have been following it since its inception (and have made some small donations). It was the Investors Chronicle page I couldn’t get back to…I obviously didn’t make myself very clear. Sorry

Lisa

Reply to the comment left by “Mervin SX” at “09/07/2015 – 00:13“:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/443277/6041_Restricting_finance_cost_relief_for_individual_landlords__3_.pdf

Para1

Reply to the comment left by “Gary Nock” at “09/07/2015 – 08:28“:

Gary,

Sorry for the late response. I will try and explain better:

Tax to be paid is calculated as 40% of Property Income minus Finance Costs (and other costs).

Example:
Property Rental Income is £12,000
Finance Costs is £3,600
TAX = 40% x (12,000-3,600) = £3,360

This last line can also be mathematically written differently:
TAX = 40% x 12,000 – 40% x 3600 = £3,360
In other words, you could reduce your tax bill of 40% of 12,000 by reducing 40% of your Financial Costs.

The government’s proposal now is to only allow financial cost deduction at 20%.
Therefore, TAX = 40% x 12,000 – 20% x 3600 = £4,080 (my example said 5520, which was a late-night mistake).

Hope this helps…

Reply to the comment left by “Dan Smith” at “09/07/2015 – 08:32“:

Gary,

Sorry for the late response. My example on page 9 said 5520, which was a late-night mistake – it should read as £4080.

Example:
Property Rental Income is £12,000
Finance Costs is £3,600
TAX = 40% x (12,000-3,600) = £3,360

This last line can also be mathematically written differently:
TAX = 40% x 12,000 – 40% x 3600 = £3,360
In other words, you could reduce your tax bill of 40% of 12,000 by reducing 40% of your Financial Costs.

The government’s proposal now is to only allow financial cost deduction at 20%.
Therefore, TAX = 40% x 12,000 – 20% x 3600 = £4,080

The £3,600 remains the same because that’s your Finance Costs (bank charges & mortgage interest)

Hope this helps…

This change is scary – I’ve been trying to work out how this works and have now found the link to the HMRC on this site. So if I’m right this is the impact.

Using simple number to aid illustration. Assume a 40% taxpayer with £10k rental and say £10k of all costs, £7k of which are finance (not just interest note!). At present you make no profit and pay no tax – simple.

Forgetting the tapering for now as we are all looking long term – when done and dusted the new regime will work like this.

£10k rental income, £3k costs – you will now NOT be allowed to take finance costs as a deduction – so your “profit” is £7k.

HMRC will allow tax relief at 20% against the interest. So as a basic rate tax payer you have nothing to pay. As 40% tax payer you pay 20% on the profit – £1.4k

So that how it works – you pay tax even though in reality (well today’s reality) you have in fact not made a profit.

What the Chancellor is forgetting, is that we’re buying to rent out to people who can’t afford to buy & need to live somewhere.
People that buy for theirselves don’t need tax relief as they ain’t spending money for someone else to live there.

Anyway, I need help too.
I’m pretty good at Maths. I can do the Rubiks Cube ha ha.

BUT I never understand there ruddy tax complications.

So for example, let’s say I receive £400k rents pa.
Ignore all other costs & 20% & 45% Tax rate etc. And let’s use round figures. And also let’s leave personal allowances out of it for simplicity.
Yes, I do understand paying into pension etc. to go below 100k earnings (although he’s ruddy limiting that), but let’s ignore everything else.

Let’s say £40k mortgage interest a year.

At moment, £400,000 rents minus £40,000 mortgages = £360,000 profit.

£360,000 x 40% Tax = £144,000 Tax. Leaves £216,000 net profit.

How does new Tax scenario affect the above.

So if someone ie Finance Top Man Neil could fill in the missing amounts:

£400,000 rents etc. etc.

Reply to the comment left by “Arwel Davies” at “10/07/2015 – 08:10“:

Arwel, I think your example is the best yet, congratulations!

For those still struggling with the maths, please see our calculator (and a useful tax reduction scheme) via the article linked below
.

Reply to the comment left by “Arwel Davies” at “10/07/2015 – 08:10“:

Arwel, I think your example is the best yet, congratulations!

For those still struggling with the maths, please see our calculator (and a useful tax reduction scheme) via the article linked below
.

Many people are struggling to get their heads around how to calculate their tax liability (I did too until I fathomed it out). Below is what I’ve worked out, it is simplified as it assumes the profit is all at a single marginal rate, but you can see the principle.

Up until now the formula for calculating tax (simplified) was:
TaxPayable = (Income – Expenses) x TaxRate
where Expenses includes Finance Costs plus other Expenses (insurance, repairs, agent fees etc)

Using simple maths this can be expressed as:
TaxPayable = Income x TaxRate – Expenses x TaxRate

The new regime the calculation becomes:
TaxPayable = Income * TaxRate – OtherExpenses x TaxRate – FinanceCosts x 20%

As an example for a 40% tax payer with rental income of £50k, mortgage interest £25k, other Expenses £10k.
Under the old rules:
TaxPayable = (£50k-£25k-£10k) * 40% = £15k(profit) * 40% = £6k
Net Profit (after tax) = £50k(income) – £35k(expenses) – £6k(tax) = £9k

Under the new rules:
TaxPayable = £50k x 40% – £10k x 40% – £25k x 20% = £11k
Net Profit after tax) = £50k(income) – £35k (expenses) – £11k (tax) = £4k

This is almost a doubling in the amount of tax payable! The tax man is making more than the Landlord!!

Reply to the comment left by “Mick Roberts” at “10/07/2015 – 08:46“:

Hello Mick,
If you are a 40% tax payer you can now only claim half of your total interest as an expense. So for your example:
Total rent = £400,000 less £20,000 interest for your mortgages (Not £40,000) = £380,000 Profit
Tax at 40% of £380,000 = £152,000
You pay extra £8,000 tax!!!!!!
(Which is 40% of the £20,000 interest that you can no longer claim for)

Hope this helps.