Chancellor hits landlords for billions! How will this affect your cashflow?

Chancellor hits landlords for billions! How will this affect your cashflow?

18:24 PM, 8th July 2015, About 6 years ago 41

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Chancellor hits landlords for billions

How much worse off might you be as a result of the limitations on claiming BTL mortgage interest as a taxable expense?

We’ve built a calculator to help you work it out.

First of all, allow me to explain the issue ….

Tax relief on Buy-to-Let mortgages is to be reduced to the basic rate of tax phased in over four years commencing 2017.

The Bank of England recently reported that Buy-to-Let mortgage balances amounted to circa £200 billion.

Assuming an average interest rate of just 3% that equates to interest of £6 billion a year.

Given that most landlords are likely to be 40% tax payers (or soon will be!) the loss of 20% tax relief for 40% tax payers means that landlords are likely to be around £1.2 billion a year worse off as a result of the Summer 2015 budget.



Comments

by Ian Ringrose

23:45 PM, 9th July 2015, About 6 years ago

If you have employment income, you could pay into a pension to get yourself out of the 40% band - may give a very good rate of return depending on how much interest you pay.

Likewise fit a new kitchen and sell the next year so creating more costs to deduct from tax, and reducing gearing.

by Bob Plumb

8:15 AM, 10th July 2015, About 6 years ago

Put extra into a pension,that thought occurred to me as well.

by Puzzler

8:32 AM, 10th July 2015, About 6 years ago

Reply to the comment left by "Mark Crampton Smith" at "09/07/2015 - 17:28":

I believe it's past the white paper stage once it's in the budget, although that doesn't mean it won't change

by Mick Roberts

8:47 AM, 10th July 2015, About 6 years ago

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.

by Appalled Landlord

14:26 PM, 10th July 2015, About 6 years ago

George Osborne was on the news this morning in connection with making planning approval automatic for building on brownfield sites. He wants to make it easier for developers to build the houses and flats the country desperately needs.

This comes two days after he attacked the sector which has done most to encourage new-builds this century with his iniquitous tax on something that is a cost rather than an income.

It was the commitment of BTL investors who bought off-plan who enabled developers to build many of the hundreds of thousands of new flats and houses on brownfield sites since the millennium.

We did not take existing properties away from first-time buyers (FTB’s). On the contrary, we facilitated the construction of new homes, some of which were bought by owner occupiers who thereby freed up properties for FTB’s. In addition, the developers had to build affordable housing on the same site, for housing associations.

If BTL landlords had not made this commitment, developers would not have sold so many properties, or so quickly. Therefore they would not have been able to start their next projects so soon. There would have been fewer homes today, and rents would be higher.

George Osborne wants to encourage new-builds. I suggest he does so without our help.

We should go on strike by not buying them, either off-plan or finished. Those who have paid a 15% deposit are stuck with their purchase, but those who have only paid a few hundred pounds might consider sending a clear message to the big house-builders by cancelling their purchase and saying why.

In January 2007, well before the sub-prime scandal stopped the property market in its tracks in the August, an RICS surveyor told me that developers were cancelling projects, mothballing construction sites and laying off workers. The recession had already begun then. This was because investors had stopped buying property because the Bank Rate was so high they could get the same return by leaving their money in the bank, but with no effort.

This shows how important BTL investors are to the construction industry and thus to the wider economy, not just to the stock of property. Now we are under attack, it is time to strike back!

by Alan Loughlin

14:36 PM, 10th July 2015, About 6 years ago

shelter and their ilk are to blame for all this, and the subsequent inevitable rent rises it will cause. Although they are a load of bigoted pratts they say it so often that people believe it to be true.

by Michael Barnes

17:03 PM, 10th July 2015, About 6 years ago

Reply to the comment left by "Romain Garcin" at "09/07/2015 - 18:55":

Having read the HMRC information on this (https://www.gov.uk/government/publications/restricting-finance-cost-relief-for-individual-landlords/restricting-finance-cost-relief-for-individual-landlords, it appears that the position is (ignoring the 45%tax bracket, because I do not fully understand the impact there):

1. You still calculate lettings profits by deducting all interest and financing charges from your income to give a nett profit.
2. If your income for the year is then less than the 40% threshold, then you pay no tax on finance costs.
3. If you go into the 40% band, then you pay an additional 20% on the smallest of:
A. The amount of total income in the 20% bracket.
B. Lettings profit.
C. Finance costs.

So, if you make a loss from lettings, then there is nothing more to pay.

NOTE that "Finance Costs" includes mortgage arrangement fees.

I've still not got my brain around whether or not this is 'fair'

by Appalled Landlord

1:16 AM, 11th July 2015, About 6 years ago

Reply to the comment left by "Michael Barnes" at "10/07/2015 - 17:03":

Hi Michael

I don’t know if what you describe is what is intended, but that is not what the document from HMRC that you quote above states.

It says that from the tax year ending on 5 April 2021, 0% of finance costs can be deducted from property income to arrive at property profits. So all of the finance costs will be added back to the real profit that would be calculated on normal accounting principles, to arrive at our “income” from property.

This will be added to any other income like salary or pension to find our gross income, which will determine whether we pay tax at 20%, or cross the threshold into the higher rates of 40% or 45%.

In other words, as regards our properties, we will be taxed on our finance costs as well as our real profit. A deduction of 20% of the finance costs will be allowed against the tax calculated on the inflated “gross income”.

The result is that some of us will bear a levy of 20% or 25% on our finance costs (the rate of tax imposed, less the 20% allowed)..

There is an example on the original thread posted at 19.25 by Claire Oswald: http://www.property118.com/budget-2015-landlords-reactions/76164/comment-page-19/#comments

Ignoring the personal allowance, the example shows how this levy will be payable even when there is no real profit from property to provide the cash to pay it. The situation would be worse from a cash point of view if a real loss were made. And of course, this levy will increase when interest rates rise.

It is not hard to envisage that HMRC will bankrupt some people because they will not be able to pay the levy. However, as HMRC’s document reassures us, “The measure is not expected to impact on family formation, stability or breakdown.” So that’s all right then.

by Amit Chada

21:43 PM, 12th July 2015, About 6 years ago

Reply to the comment left by "Mick Roberts" at "10/07/2015 - 08:47":

Hi Mick,

Let me reword your example to hopefully make the new rules clearer

Taxable income = 400k
Initial Tax Bill = 400k * 40% = 160k
Mortgage costs = 40k
Morgage Tax Relief = 40k * 40% = 16k
Final Tax Bill = 144k
Profits = 400k - 40k - 144k = 216k

Same numbers as you had listed above. Under the new rules:

Taxable income = 400k
Initial Tax Bill = 400k * 40% = 160k
Mortgage costs = 40k
Mortgage Tax Relief = 40k * 20% = 8k
Final Tax Bill = 152k
Profits = 400k - 40k - 152k = 224k

So you are 8k worse off per annum. I think the confusion people are having is they are thinking about finance cost as being 100% deductible.

How they should think of it is: 100% of the amount is eligible for tax relief. Previously the tax relief has always been equal to their own tax band. Once implemented, tax relief will be capped at 20%, but 100% of the costs are still eligible for tax relief.

Regards,
Amit

by Mark Alexander

21:46 PM, 12th July 2015, About 6 years ago

Please can everybody who thinks they know how the tax will work check the following examples for me and if you think I have gone wrong, please explain where you think I have gone wrong and why?

SCENARIO TODAY

Gross rental income: £100,000

Loan interest: £75,000

Other allowable expenses: £25,000

Taxable Profit: £0 (zero)

SAME SCENARIO IN 2020/21 TAX YEAR

Gross rental income: £100,000

Other allowable expenses: £25,000

Taxable Profit: £75,000

Loan interest of £75,000 reduces tax bill by £15,000 (i.e. 20% of interest payable)

SAME SCENARIO IN 2020/21 TAX YEAR BUT AFTER AN INTEREST RATE INCREASE

Gross rental income: £100,000

Other allowable expenses: £25,000

Taxable Profit: £75,000

Loan interest of £100,000 reduces tax bill by £20,000 (i.e. 20% of interest payable)

Thanks in advance.
.


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