Interest restriction impact on high rate earners – Help?

by Readers Question

8:29 AM, 5th January 2017
About 2 years ago

Interest restriction impact on high rate earners – Help?

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Interest restriction impact on high rate earners – Help?

My wife and I are both employed full time on basic annual salaries of £45k and £97k respectively.drowning

We let out 14 BTL mortgaged properties (avg 65% ltv across the portfolio) generating an annual rent of £215k, expenses of about £50k and mortgage interest of £150k.

What options do we have to protect ourselves once the new tax rules come into force (appreciate it is over 4 years)?

We need about £7k per month after tax for our own living expenses. We have looked into the option of putting as much as possible into a pension and doing a declaration of trust to put 99% of all income towards the lower tax payer but that does not seem to prevent us from the tax bill going up massively.

We also have two kids under the age of three. Any chance we can use their personal allowances (if they get one)?

Shehreyar



Comments

Neil Patterson

8:39 AM, 5th January 2017
About 2 years ago

Hi Shehreyar,

I have two pages for you to check out:

Our main tax planning page >> https://www.property118.com/tax/

Why You Need To Become A Rental Partnership >> https://www.property118.com/need-become-rental-partnership/93073/

There is never any one size fits all unfortunately and it is impossible to give helpful guidance without knowing ALL your circumstances.

Mark offers his consultancy at £400 because he cannot cope otherwise with everyone that needs his help. However, if we can't help we always have a no quibble money back policy at Property118.

From our Tax Planning page:

Within a half hour telephone consultation I can usually glean enough information to identify what the best options would be for you to consider. Within another 90 minutes I can run all the numbers and prepare a report for you to consider, which includes the number crunching, explains your options, recommends the professional advisers to use for implementation and quotes for doing the work. The total cost is £400 inclusive of VAT, i.e. £100 for each 30 minutes x 4 = 2 hours in total.

Upon receipt of payment I can usually schedule an initial call with you within two working days and submit my full written report to you by close of business the following working day at the latest.

Please note that I do not promote “schemes”. Any guidance offered will point you directly to legislation which can be used to your advantage and fully insured, fully qualified professional advisers to assist you with implementation.

I look forward to hearing from you.

Yours sincerely

Mark Alexander – founder of Property118.com

>> https://www.property118.com/tax/

Paul Mullally

11:36 AM, 5th January 2017
About 2 years ago

Hi Shehreyar
I personally think you have two separate issues that you should be investigating.

1. Annual Income. If you add on the additional net income from your property portfolio, you are dangerously close to the threshold limit of £110k which would limit your maximum pension contributions of £40k pa therefore reducing that benefit. Equally, once your income goes above £100k, you start to lose your personal allowances. So between £100-£110k, you have an effective tax rate of 65%. You need to shift as much of your income allowable to your partner asap.

2. Property Portfolio. Create a partnership first, then Incorporate asap. It is highly anticipated that the Govt. will attack the CGT relief currently available when Incorporating, so time is definitely of the essence. However, you must consider the cost impact of re-financing.

Once the Portfolio is within a Ltd company, you can then decide how you take the income as either dividends, small salary etc. or leave it within the company for later further investment.

If you can't work through the details yourself to redistribute your income, your accountant really should have been advising you what to do.

I've done pretty much exactly what I advised you to do, and have reduced my tax burden significantly. I also take full advantage of every "tax friendly" scheme possible e.g. ISA's, Pension contributions, Help 2 Buy ISA's for my kids, Pensions for my kids etc.

Good luck...Paul.

Jamie M

12:30 PM, 5th January 2017
About 2 years ago

I suggest you sell as many properties as it takes to make the remainder mortgage free and pay tax on profits only

Paul Mullally

13:32 PM, 5th January 2017
About 2 years ago

Hi Shehreyar,
I don't think you need to sell properties to reduce the impact as it now costs so much (+3% SDLT) to grow the portfolio back up if that's your intention longer term.

You haven't said if your salaried incomes are from your own business or as an employee of others i.e. whether you can control the amount or way you earn in-order to reduce your tax burden. If not your own, you should really look to incorporate your rental business as Mark suggests and look to do it before the next budget if at all possible. If it's your own business, you have lots of options, but you should discuss these with your accountant.

You can't use your children's Tax codes as they don't have one until the age of 16. Even then, you can't do as suggested.

To minimize your tax burden, you need to attack it both personally and from a Property perspective. If you can't keep your earnings below £100k pa, from that to £110K you have an effective tax rate of 65% through loss of your personal allowances. Above £110k, you then start to reduce the amount of tax relief on your pensions contributions removing any benefit there. Unless your partner is a Director of a company, you will also be limited to how much pension contributions she can make.

From a Property Incorporation side, you will need to factor in the costs of re-financing which could be considerable so don't underestimate it. Alternatively, If you do consider selling some as Jamie suggested, you need to consider the CGT that you will be liable for. To minimize that, you'll need to spread the sales over the next 3 or 4 tax years to beat the impact of Section 24 Tax changes but at the same time using your annual CGT allowances.

You need to get yourself a good accountant or prepare to start doing your own research.

Good luck...Paul.

Laurie

9:22 AM, 7th January 2017
About 2 years ago

Hi, i would concur with the comments above, in addition, your margins are wafer thin, any increase to bank interest rates would potentially wipe out your small profit, and without restructuring or selling up, you will eventually be paying tax whilst effectively losing money. Its surprising at 65% gearing your margin is still so slim, i would consider selling up and spreading the sales to minimise CGT, reinvest in better yielding investments..
Good luck


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