Summer Budget 2015 – Landlords Reactions

Reply to the comment left by “Simon Dewsberry” at “10/07/2015 – 16:14“:

Hmm, well clearly someone’s misunderstood the new rules! Here’s how my accountant explains this change.
The second change and probably the most significant is the restriction of tax relief on interest. At present, full tax relief is available for interest on a loan used in a property business. The funds may have been used to purchase the let property, to make major repairs, or just to fund the working capital of the property business. From April 2017, tax relief on interest in property businesses (including single buy to lets) will be restricted so that by 2020, interest will not be an allowable expense in computing the profits of the business, but will attract tax relief at 20%. For example if your mortgage interest was £2,500 pa you are no longer able to claim this full amount against the rental but instead you will just be allowed ‘interest relief ‘ at 20% – so just £500 can be claimed.

Obviously, I haven’t included other expenses and Personal tax allowances in my example.

Reply to the comment left by “Simon Dewsberry” at “10/07/2015 – 16:14“:

Hmm, well clearly someone’s misunderstood the new rules! Here’s how my accountant explains this change.
The second change and probably the most significant is the restriction of tax relief on interest. At present, full tax relief is available for interest on a loan used in a property business. The funds may have been used to purchase the let property, to make major repairs, or just to fund the working capital of the property business. From April 2017, tax relief on interest in property businesses (including single buy to lets) will be restricted so that by 2020, interest will not be an allowable expense in computing the profits of the business, but will attract tax relief at 20%. For example if your mortgage interest was £2,500 pa you are no longer able to claim this full amount against the rental but instead you will just be allowed ‘interest relief ‘ at 20% – so just £500 can be claimed.

Obviously, I haven’t included other expenses and Personal tax allowances in my example.

is that £500 off the tax bill (ie 20% of £2500 as the expense) or £500 as the actual expense ……..? i think it is the former ?

Reply to the comment left by “Simon Dewsberry” at “10/07/2015 – 16:34“:

Good point. I’m not sure which. However, I prepared some calculations for my actual rental income based on my original post and my accountant agreed with them.

Reply to the comment left by “MuckyBoots ” at “10/07/2015 – 12:07“:

No, only the element that relates to the 40% tax bracket ie (from April 16 £43k) so only on the interest relevant to the difference between £43k and the £30k salary plus £15 rental income so £3k. So your tax bill will be £600 more than normal (ignoring all other variables). I think

£500 (20%) off your tax bill is the same as £2500 as the expense set against profits as a basic rate payer.

Reply to the comment left by “Simon Dewsberry” at “10/07/2015 – 16:34“:

It would have to be off the (higher rate) tax bill otherwise it would affect those that pay tax at the basic rate and this change doesn’t.

Reply to the comment left by “Claire Oswald” at “10/07/2015 – 16:42“:

Claire, I’m confused! If you read my previous post which includes my accountants explanation of the new rules, it implies the new rules apply to ALL rental income.
I hope either a)I’m being really stupid, or b) My very respected corporate accountants based in the City are wrong. Either would be fine by me as I prefer Simon’s take on the new system!!

With what I’ve read I understand that the finance costs are now not factored in to derive the income level for tax purposes.

Simple example below based on having no other income and the higher tax threshold being £43,385.

Income – 108,000 pa
Interest – 45,000 pa
Costs – 20,000 pa

Scenario A – old method of calculation would result as

108,000 – 45,000 – 20,000 = 43k pre tax (so in 20% tax bracket)

Scenario B – New method for calculation would result as

108,000 – 20,000 = 88k pre tax (so now 40% tax bracket)

So with the change this moves somebody from the 20% tax band to the 40% tax band.

Have I got this wrong or completely missed an aspect of this?

I think what I find annoying or upsetting is the simple fact that they would have know full well this was coming but made no mention of it during the election campaign, and you wonder why people have little faith in politians!!