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 Alan Loughlin

21:52 PM, 12th July 2015, About 6 years ago

is this assuming everyone is not a basic rate taxpayer?
my understanding is basic rate taxpayers will not be affected, and if partly so, ie rental income pushes the person into higher bracket, then the propertion under the level is allowable.

by G Cox

22:22 PM, 12th July 2015, About 6 years ago

Reply to the comment left by "Alan Loughlin" at "12/07/2015 - 21:52":

Yes, but you may be pushed into the higher bracket simply by the change as BTL interest cost can no longer be used to calculate the income counted to assess whether you are over the 40% rate.

One minute your promotion, bonuses or overtime is taxed at 20% and then suddenly at 40% just because of this the change in calculation. Obviously it is phased, but it does not change the principle.

People used to all have the same 40% threshold. Now it depends £ for £ on the extent of your BTL loan interest that you would normally use as a deduction.

Only way out , if you have someone with less income, is to buy BTL jointly and assign some/most rental income to them.

by Alan Loughlin

22:29 PM, 12th July 2015, About 6 years ago

we have ours jointly owned and so share tax allowances so will be below, I believe it will make no difference to us. The removal of the 10% renewals will though, we do not spend 10% of gross rents on renewals so this has been generous, strangely our accountand many years ago said it was over generous and would one day be removed, to be fair this is only supposed to be for fully furnished accomodation, but maybe is claimed when not, but it does make for easy accounting.

by Appalled Landlord

1:38 AM, 13th July 2015, About 6 years ago

Reply to the comment left by "Mark Alexander" at "12/07/2015 - 21:46":

Hi Mark

Previously everyone on this forum had assumed that the tax relief would be 20% of the finance costs. However, HMRC’s description states that it is 20% of the lower of the finance costs or the profits of the property business in the tax year.

Today the tax due on zero is zero.

In 2021 the tax calculation would be 40% of £75,000 i.e £30,000.
The tax payable would be £30,000 less the tax relief of £15,000 that you show, making £15,000. So you would have made zero profit, but would owe £15,000 on it. This means that you will suffer a cash outflow of £15,000 which you will have to make up from another source. This is your extra contribution to paying off the National Debt.

In 2021 if interest had increased to £100,000, the tax calculation would still be 40% of £75,000, i.e £30,000. The tax relief would be 20% of the lower of the finance costs (£100,000) or the profits of the property business (£75,000).

The latter is the lower, so the tax relief would still be £15,000, and you would still owe HMRC £15,000. But your portfolio will have made a loss of £25,000, so you will suffer a cash outflow of £40,000 which you will have to make up from another source.

HMRC’s description states that any excess finance costs may be carried forward to following years if the tax reduction has been limited to 20% of the profits of the property business in the tax year.

It does not define how the excess is calculated. Presumably it is £100,000 minus the £75,000 on which the relief is calculated. Presumably it can be used in a later year when the property profit exceeds the finance costs.

by Carol Thomas

15:25 PM, 13th July 2015, About 6 years ago

I have now read and re-read the above and all I can say is -

OMG this is making my head hurt!!!!!

I can only hope my accountant is on the ball!

by Michael Barnes

22:43 PM, 14th July 2015, About 6 years ago

Reply to the comment left by "Appalled Landlord" at "11/07/2015 - 01:16":

Having re-read the HMRC document, I fear that you may be right and I wrong.

I have emailed HMRC for clarification.

If it is as you say, then it is in no way fair

by Barry Fitzpatrick

14:15 PM, 28th July 2015, About 6 years ago

"HMRC’s description states that it is 20% of the lower of the finance costs or the profits of the property business in the tax year."

Is this actual profits or HMRC's notional profit?

by Barry Fitzpatrick

14:41 PM, 28th July 2015, About 6 years ago

Anyone aware of the ATED tax?

https://www.gov.uk/annual-tax-on-enveloped-dwellings-the-basics

Currently only affects £1m+ houses but is coming down to £500k+ house in the next 2 years, so probably won't impact many Landlords. But if the Chancellor decides too many private Landlords are buying through Ltd Co who knows if he'll lower the threshold further..

by Appalled Landlord

14:50 PM, 28th July 2015, About 6 years ago

Reply to the comment left by "Barry Fitzpatrick" at "28/07/2015 - 14:15":

They will only accept one profit calculation - theirs.

by David Price

14:59 PM, 28th July 2015, About 6 years ago

But of course the chancellor knows that this extra taxation will not elevate rents.


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