Fair Rents (Scotland) Bill or Artificial state manipulation of free market rent?10:34 AM, 6th November 2020
About 4 weeks ago 36
I give my analysis in the video below on what the first UK budget of 2020 means for property investors and property entrepreneurs and considers any impact on the UK property market.
The key budget highlights for property investors and entrepreneurs are:
Temporary relief on business rates which will also help property developers converting commercial building.
Increase in what you can claim on capital allowances on commercial buildings.
£3k cash grant for business eligible for small business rates relief.
Uplift in Employers NI contributions threshold from £3000 to £4000.
No VAT on Ebooks. Ie no tax on electronic learning.
2% SDLT surcharge on foreign buyers.
Entrepreneurs relief survives but lifetime limit reduced from £10 to £1m.
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As of 6th April 2020 private landlords (including Members of Partnerships and LLP’s) will not be able to treat any of their finance costs as a business expense. This includes both interest and arrangement fees. Instead, they will receive a tax credit of just 20% of their finance costs in order to reduce their tax bill.
This Case Study explains why so many property rental business owners are considering incorporation, by comparing the tax position of a private landlord vs that of a private hotelier:
The hotelier will pay £7,500 of income tax. This is broken down as follows; £nil on his first £12,500 of net profit and 20% tax on the next £37,500.
However, the private landlord cannot treat his finance costs as a legitimate cost of business in the same way as the hotelier. Accordingly, his tax bill is £27,500.
This is because his taxable income is treated as being £125,000 due to being unable to claim his finance costs as business expenses. Furthermore, for every £2 of taxable income over £100,000 he loses £1 of his nil rate tax band.
Accordingly, the landlord pays tax at a rate of 20% on the first £37,500 (which equates to £7,500) and then 40% tax on the other £87,500 (which equates to £35,000). This adds up to a whopping £42,500.
The government then grant him a tax credit equal to 20% of his finance costs, in other words £15,000 off the £42,500 leaving him with a net £27,500 of tax to pay.
To summarise, the private landlord pays nearly four times as much tax as the private hotelier, even though their financing costs and business results otherwise produce identical levels of actual profit.
HOWEVER, if both the landlord and the hotelier operated their businesses within a Limited Company structure, they would pay exactly the same amount of tax.
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